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Finance: What are Debt Service and Debt Service Ratio? 3 Views
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Description:
What are Debt Service and Debt Service Ratio? Debt service is the amount of funds needed by a borrower to successfully cover interest and principal payments over a specified time period. The debt service ratio is a calculation of net operating income divided by total debt service. The quotient of the calculation gives the Debt Service Ratio and the difference of the service numbers from the income indicate if the borrower can handle additional debt if needed.
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Transcript
- 00:00
Finance, a la shmoop. What is debt service and debt service ratios? Well debt
- 00:08
service is just the interest you pay on debt in a given year. Like you're [Definition written on a 100 dollar bill]
- 00:14
servicing the debt, like think about the oil demanded by a robot in a year she
- 00:19
demands to be serviced and the oil you serve her will you know quench her [Robot drinking oil]
- 00:24
thirst. Well debt service can be easy or it can
Full Transcript
- 00:28
be hard, like whatever.com has 50 million bucks of 6 percent debt costing 3 [The debt service calculation is shown]
- 00:33
million a year to service. Well if whatever.com had 40 million bucks in [Vault full of money]
- 00:38
cash profits servicing its debt would then be easy and it would have a debt [Someone repeatedly pressing an easy button]
- 00:43
service ratio of 40 over 3 or 13 and 1/3 times coverage. Said another way the odds [The ratio calculation is shown]
- 00:50
that whatever.com would find itself in a position that it couldn't service
- 00:54
its debt are well very low. But think about the other side of the coin if [Somone about to flip a coin]
- 00:58
whatever.com had only 4 million dollars in cash profits well then it's debt
- 01:02
service ratio is 4 over 3 meaning that 75% of its cash flow leaves the company [Money going from whatever.com to the lenders]
- 01:08
and goes into the coffers of the kindly loving lenders who are nervous about the
- 01:13
company falling into default and going bankrupt which does not make the oil go
- 01:18
down easy... [Robot drinks oil and spits it out]
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