What is the significance of a debt service coverage ratio greater than 1.0?

A debt service coverage ratio (DSCR) greater than 1.0 indicates that a company generates enough cash flow to cover its debt obligations, including both interest and principal repayments. This ratio is crucial for assessing the financial health of a business, as it reflects the company’s ability to service its debt without financial strain.

When the DSCR is above 1.0, it signifies that the company's earnings exceed its debt payments, providing a buffer against financial difficulties. This surplus can be essential for sustaining operations, investing in growth, or weathering economic downturns. A healthy DSCR is an indicator of financial stability and investor confidence, since it suggests that the company is managing its obligations effectively.

In contrast, a DSCR of 1.0 would mean the company is just covering its debt obligations without any margin for error, whereas a ratio below 1.0 would indicate that the company does not generate enough cash flow to meet its debt payments, which could lead to financial distress or bankruptcy.