Financial Ratio

A financial ratio is one financial quantity divided by another to produce a comparable measure of performance, leverage or coverage. Debt service coverage ratio is a coverage ratio in this family, alongside interest coverage, and appears in the standard table of debt ratios.

Ratios remove scale. A $150,000 duplex and a $2 million apartment building cannot be compared on dollars of income, but both can be compared on whether income covers debt service 1.2 times. That is why lenders quote DSCR rather than dollar cash flow.

DSCR sits with other debt ratios: debt-to-income measures a borrower's payments against income, loan-to-value measures loan against collateral, interest coverage measures earnings against interest. Each answers a different question about the same loan. A DSCR lender uses DSCR and LTV together and drops DTI, which is the defining feature of the product.

Further reading: Financial Ratio on Wikipedia.