Perhaps there may be some variance in approach, but I would like to get a feel for what may be the most typical way of looking at the Debt Service Coverage Ratio. To try to be as specific as possible, let's say that we have the business tax returns [form 1120] for a small company. After taking the net income or loss, and adding back depreciation, amortization, etc., we have the adjusted cash flow. Assume for the moment that there is no interest expense to be added back, nor any other applicable expenses that would be eliminated due to the creation of the new debt and acquisition of assets. Do you then take the adjusted annual cash flow and divide by the annual P&I payments for the proposed debt to derive the DSC...or you do subtract the income tax from the cash flow and then do the division to derive the DSC, after taxes?

Now let's consider the interest expense...if the interest expense presented will in fact continue because the proposed debt is new money, not a refinance, then it would seem to me that it would not be appropriate to add back interest expense...only when the proposed debt would be taking the place of all current debts would it seem appropriate to add it back.
If the proposed debt is taking the place of only part of the debt, it would seem that some type of percentage allocation should be applied in adding back interest.

If you are going to add back interest in all cases, then it would seem that to calculate a valid DSC, you would need to include all payments, for the proposed debt and for all current debts that will remain after the proposed debt facility is funded.

Maybe I am trying to think about this too much...or maybe I am not thinking through this as thoroughly as I need to...any assistance and guidance is appreciated greatly! Thank you!

Mike, at our bank this is what we do: from the tax returns we take the net income or loss and add back the interest and depreciation- that is the cash flow.

The debt we use: All payments owed plus the new debt payment.

If we use business tax returns we do business debt only.
If we use his personal tax returns which would have his sideline businesses included we use all debt.
We also do global dsc which would be all personal and all business income and all personal and business debt.

We are consistent in how we figure the dsc and sometimes we might have a loan officer that averages two years of tax returns etc because of some valid reason.