EBITDA divided by total debt service (interest expense plus short-term debt). Measures how comfortably a company can meet its near-term debt obligations from operating earnings. Above 3x is comfortable; below 1.5x signals potential distress if cash flows decline.
Formula
Description
Measures how comfortably a company can meet its near-term debt obligations - both interest payments and maturing principal - from operating earnings. This is more comprehensive than interest coverage alone because it accounts for short-term debt that must be repaid or refinanced within a year.
Interpretation
Above 3x is comfortable. Between 1.5x and 3x is manageable but worth monitoring. Below 1.5x signals potential distress if cash flows decline. Companies with no debt obligations score very high. Lenders typically require a minimum DSCR for loan covenants.
Related Risk Indicators
Whether gross margins are improving or declining over five years. A positive trend means the company is gaining pricing power or reducing costs. Negative trends in a mature business are a warning sign.
Whether bottom-line profitability is improving or declining over five years. A positive trend indicates the business is becoming more profitable. The most durable improvement comes from expanding gross margins rather than cost-cutting.
The lowest ROIC recorded over five years. A company with a high minimum ROIC (above 10%) maintains strong returns even in bad years, indicating a genuinely strong business with a durable competitive advantage.
Measures the accrual component of earnings relative to total assets. When cash flow exceeds reported earnings, the company has high-quality earnings. Large accruals relative to assets are a red flag for potential manipulation.
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