Premise
Leanus allows you to calculate the DSCR in various ways both on historical data, that on provisional data (quarterly, half-yearly, etc) which on the forecast data of the Business Plan and to compare the DSCR between different companies (Benchmark).
The DSCR provides:
- in the Numerator the Cash Flow generated in the period
- in the Denominator the commitments to the financial system (Capital + Interest)
There are many ways to calculate DSCR and there does not seem to be a prevailing standard. Sometimes EBITDA or other indicators are used as a proxy for Cash Flow.
In general, a ratio greater than “1” would indicate the company's ability to meet its obligations thanks to its ability to generate cash from its core business.
Operational issues
To calculate the DSCR in a timely manner it is therefore necessary:
- Develop the Operating Cash Flow, to determine the numerator
- Determine the amount of commitments to the financial system. To do this in a timely manner, it is necessary to access detailed information that is generally known only to the company (treasury dynamics, amortization plans, etc.)
If such information is known, the user can enter it directly on the screen by “flagging the checkbox and reading the instructions”; in all other cases Leanus allows a reliable estimate to be made for each accounting period and with different methodologies.
The choice of the calculation methodology to adopt therefore depends on the information available. It must also be taken into account that in the absence of analytical information some official balance sheets allow only approximations of the indicator to be obtained. For example, for abbreviated balance sheets, it is not possible to determine the Cash Flow and therefore the value of the Numerator can only be approximated through an EBITDA calculation
Leanus allows you to manage all the different exceptions, allowing the user to complete the template in case of missing information
DSCR Calculation in Leanus
Leanus calculates DSCR in different ways
- DSCR on CFCCO (Cash Flow Operating Working Capital)
- DSCR on CFO (Operating Cash Flow)
- DSCR on CFO net of tax cash flow
- Leanus DSCR
- DSCR on EBITDA
Al Numerator of the DSCR you can choose:
- Cash Flow Operating Working Capital
- Operating Cash Flow
- Operational Cash Flow adjusted for Fiscal Cash Flow
- Proxy EBITDA
Both adjusted to include Finance Charges that would otherwise be excluded from the calculation
The values and calculation methods can be viewed and modified in the Financial Statement prepared by Leanus
Al Denominator of the DSCR, in case the details relating to the commitments are not known, an automatic estimate is inserted calculated in the following way
- Financial Debts to MLT / amortization periods (preset to 3 and modifiable)
- Financial charges
- Share of debt to BT (preset to 20% and changeable)
Leanus also calculates the DSCR according to a proprietary algorithm that takes into account other potential financial resources
The DSCR calculation is available in the following menus:
- Balance Sheet Analysis (for DSCR analysis on historical data)
- Benchmark (for comparing the DSCR of two or more competitors)
- Business Plan (for DSCR analysis on prospective data)
After entering the hypotheses it is necessary to click on the button Update to record the values.
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Useful Information
DSCR (Debt Service Coverage Ratio) is a measure of solvency that indicates the ability of a company to generate sufficient income to cover debt payments. It is calculated by dividing the annual net operating income of the company by its annual financial obligations. A high DSCR indicates that the company has a good ability to meet its financial obligations, while a low DSCR can be interpreted as a signal of default risk. Typically, investors and lenders require a minimum DSCR to assess the solvency of a company.
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In order to verify the financial sustainability of corporate debt, analysts and industry experts are increasingly resorting to a new indicator, which does not limit itself to quantifying in a "static" manner the overall amount of financial debt in relation to net equity (as happens in traditional balance sheet ratios, such as the PFN / EBITDA ratio), but which makes it possible to examine, also on a prospective basis, the debt repayment capacity of the company and the consequent financial sustainability of the related business development plans.
A tool that makes it possible to assess the sustainability of the debt from a perspective perspective is the DSCR, or Debt Service Coverage Ratio, which compares the cash flow produced by the company, with the financial commitments undertaken in terms of principal and interest to be repaid over the time horizon considered.
When using the DSCR, it should be taken into account that when a company is experiencing strong growth, it increases its working capital, generating a cash absorption; the effect is a negative operating cash flow and therefore a Negative DSCR. The opposite effect occurs when the company reduces its business volume.
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To overcome the limitations of the DSCR, Leanus develops its own proprietary algorithm, the Leanus DSCR, which takes into account other aspects related to financial management such as liquidity, any contributions from members and other elements. The Leanus DSCR algorithm, together with the Leanus Score and the debt capacity are exclusively proprietary.
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The DSCR can in fact assume values greater than, equal to or less than unity:
- Higher than unity (DSCR>1), in the event that the operating cash flow generated exceeds the financial commitments to service the debt;
- Equal to unity (DSCR =1), the operating cash flow generated is totally absorbed by financial commitments to service the debt;
- Less than unity (DSCR<1), in the event that the operating cash flow generated is lower than the financial commitments to service the debt in the period considered, highlighting situations of financial tension with possible difficulties in repaying the debt.
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