What is the formula for debt coverage ratio?

The formula for debt coverage ratio is correctly represented as net operating income divided by debt service. This ratio is a key financial metric used to assess an entity's ability to generate enough income to cover its debt obligations.

Net operating income (NOI) reflects the income generated from property operations after deducting operating expenses but before financing costs and taxes. Debt service refers to the total cash required to cover the repayment of interest and principal on a loan within a specified period. By calculating the debt coverage ratio, an appraiser or investor can evaluate the risk associated with the investment; a higher ratio indicates a stronger ability to meet debt obligations, which is generally viewed favorably by lenders.

This ratio helps assess the sustainability of the income generated relative to the amount of debt incurred, making it a critical component in financial analysis and decision-making for investments, particularly in real estate.