Debt Service Coverage Ratios Flashcards
Debt Coverage Ratios Two Types
Profit Based Ratio and Cash Flow Ratios
Cash Flow Ratios
Help banks measure cash flow before considering interest and principal
Profit Based Ratios
Use information from income statement to analyze a company’s ability to repay a loan.
Interest Coverage Ratio
EBIT / Interest Expense This measure understates interest coverage because EBIT has been reduced by depreciation expense. Make sure to include all earnings and losses
Fixed-Charge Lease & Rental Expense
EBIT + Lease & Rental Expense / Int Expense +Lease and Rental Expense + Prior Year CMLTD
Debt Service Coverage Ratio
Net Profit After Tax + Depr. Amort. + Depletion / Prior Year CMLTD
EBITDA to Principal and Interest Ratio
EBITDA / Prior Year CMLTD + Interest Exp.
Primary Benefit of Profit Based Measures
Facilitate Communication with Borrower and in a loan agreement.
Declining ratios indicate dependence on riskier sources of repayment
Limitations of Profit-Based Ratios
Profit based ratios imply that loan repayment will have first claim on cash flow
Profit based measures do not account for major demands on cash flow, such as taxes, dividends, fixed-asset expenditure, working-capital required because of sales growth declining asset efficiency
All net income has equal cash potential
UCA Cash Flow Measures
- Debt Service Principal and Interest Coverage
2. Interest Coverage From Operating Cash Flow Ratio
Net Cash After Operations Ratios
Net Cash After Operations / Int Exp.,+ CMLTD+Current Portion Capital Leases
Interest Coverage Ratio
Net Cash After Operations / Cash Paid for Interest
Benefits of Cash Flow Measures
Very Accurate Measure of Cash Flow to service debt
Margin Of Protection
Excess Cash Flow Over Required Debt Service
Stability and Quality of Cash Flow
Stability and Predictability of Cash Flow Demands
