# Coverage Ratios
Coverage ratios measure the margin of safety that a firm has in meeting its fixed financial obligations — interest on debt, principal repayments, preference dividends and equity dividends. The higher the coverage, the safer the obligation.
## 1. Debt Service Coverage Ratio (DSCR)
$$\text{DSCR} = \frac{\text{Earnings for Debt Service}}{\text{Interest} + \text{Instalment}} = \frac{\text{PAT} + \text{Interest} + \text{Non-cash/Non-operating exp}}{\text{Interest} + \text{Instalment}}$$
Earnings for Debt Service:
| Net Profit After Tax | XXX |
| (+) Interest on Debt Funds | XXX |
| (+) Non-Cash Operating Expenses (depreciation, amortisation) | XXX |
| (+) Non-Operating items (e.g. Loss on Sale of Fixed Assets) | XXX |
| = Earnings for Debt Service | XXX |
Denominator = Interest + Principal Instalment of the loan.
Measured in times. Banks typically expect DSCR ≥ 1.5×–2×.
## 2. Interest Coverage Ratio (ICR)
$$\text{Interest Coverage Ratio} = \frac{\text{EBIT}}{\text{Interest}}$$
Shows how many times operating earnings cover interest expense. Also called Times Interest Earned.
## 3. Preference Dividend Coverage Ratio
$$\text{Preference Dividend Coverage} = \frac{\text{EAT}}{\text{Preference Dividend}}$$
## 4. Equity Dividend Coverage Ratio
$$\text{Equity Dividend Coverage} = \frac{\text{EAES (Earnings available for Equity Shareholders)}}{\text{Equity Dividend}}$$
Where EAES = PAT − Preference Dividend.
## 5. Overall Dividend Coverage Ratio
$$\text{Dividend Coverage} = \frac{\text{EAT}}{\text{Equity Dividend} + \text{Preference Dividend}}$$
## Quick Mental Map
- ICR → numerator EBIT (pre-tax, pre-interest)
- DSCR → numerator PAT + Interest + Depreciation (cash-basis view)
- Pref Div Coverage → numerator EAT (after tax, before pref div)
- Equity Div Coverage → numerator EAES (after both tax and pref div)
Always match the numerator to what is left available for the obligation being covered.