Which metric is most commonly used to gauge cash flow adequacy in debt service calculations?

• A. EBITDA margin.
• B. DSCR.
• C. Debt-to-equity ratio.
• D. Current ratio.

Answer: (B)

Debt service calculations focus on whether the cash a business generates is enough to meet its debt payments. The metric that tests this most directly is the debt service coverage ratio. It compares the cash available to service debt in a period to the total debt service due in that same period. A DSCR above 1 means there’s enough cash flow to cover payments, with a cushion as the ratio climbs. This emphasis on actual cash flow (not just accounting earnings) is why DSCR is the go-to measure for cash-flow adequacy in debt service.

EBITDA margin, while useful for profitability, doesn’t reflect debt obligations or capital needs. Debt-to-equity shows leverage level rather than cash flow to service debt. The current ratio looks at short-term liquidity but not the sustained cash flow needed to meet debt payments.