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Debt Service Coverage Ratio (Formula, Examples) | DSCR Calculation - YouTube
Channel: WallStreetMojo
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welcome back to Wallstreetmojo
investment bank tutorial and today's
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topic is DSCR ratio so DSCR is one of
the most important ratios in finance
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which is considered by a variety of
people to understand the value or the
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kind of power the company has to service
its debt alright so when we talk about
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DSCR you know it might get
complicated at a certain point in time
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but keep things simple which is need
to understand it is the power which the
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company has to service its stead within
1 year so when I say the total debt to
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be serviced you know it might include
any short of interest payments principal
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repayment sickening front payments or
any lease repayment which the company
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has to repay within 1 year so
typically the companies in the capital
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intensive sectors would run the DSCR
would run the DSCR ratio to ascertain
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the financial position at a burden at a
certain point in time so let's try to
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figure out how to calculate the DSCR forest for a for a particular company so
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so let's go to excel control n so what
are we going to calculate we are going
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to calculate the DSCR ratio and
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so this is total operating income
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/ the total debt serviceable all right
now now total debt serviceable can be
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interest repayment or let me just type
interest then principle repayment
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principle repayment and any leash
repayments if there is any right so this
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is typically the formula for DSCR now if
you talk about total total operating
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income total operating income is
generally EBIT you know earnings before
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interest in taxe so EBIT you know we
in EBIT we would also include the
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depreciation part so to make it EBITA
and EBITA would be considered for
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calculating the ratio so depreciation
and amortization that's because these
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are non-cash expenditure and this would
give us the beta and this would be the
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numerator for DSCR
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now
when you talk about DSCR you know it
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should always be greater than 1 and it
should even be greater than 2 or 3
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you know 3 times or 4 times which
just tells us that the company has
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enough power to you know repay its
debt obligations all right if it is less
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than 1 then there is a problem then
the company is running a risk of you
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know not paying its
it's creditors all right and that's
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that's the real cause of concern so
all you need to understand is what can
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be the numerator and what is the
denominator which you need to be taking
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in this particular scenario all right
and one thing more to note here is this
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would make sense like more sense for the
companies which have got debt in their
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balance sheet visibly the companies
which have relatively lesser debt all
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right so that's that's the kind of you
know
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wait age or that's the kind of precursor
which which needs to be there while you
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are computing DSCR so if you're looking
at a typical company which is in oil and
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gas or you know some company which is
got a lot of capital intensive kind of
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expenditure then that company would
finance it through debt and equity both
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instead of just going for equity you
know so to keep the balance of cost of
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capital alright so in it would make more
sense
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the DSCR would make more sense in such
companies all right so that's the kind
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of thing which which you need to note
down all right so let me just quickly
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paste it here and
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this is the kind of values which would
go in into the computation I'll just
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write it down here so this can be EBIT
and amortization EBIT + depreciation
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amortization also it can be if beta and
it's looking very clumsy here so I'm
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just gonna take this thing down so
divided by divided by this thing total
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debt serviceable so total debt
serviceable would include the principle
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repayment
lease repayments and the interest
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repayment typically within a within a
year now sometimes you know when the
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principle has to be repaid the company a
smaller company might run out of cash
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might run out of cash so in though in those is
kind of scenarios what would happen is
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the company would pay it through the
through the cash and cash equivalents
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all right so
that that is the kind of an outlier
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which the company would run in a certain
period alright
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so you need to mind that as well
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so now let us look at the DSCR
calculation for a for a very
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capital-intensive company let's say
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so let's just say chevron chevron card
all right so if you chevron card was a
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very big company it's a very huge
company so let's just try and understand
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the DSCR calculation for for such a
huge company alright so let's just go
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back here and go to Edgar
I guess it's open here we can use this
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Chevron and
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go to chevron corp and open the annual
report always open the annual report and
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here you would see 10k and you see there
you go it's it's it's a huge company so
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right now you need to find out the
income statement so to get it idea of
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EBITA and then later on we would look
at the cash flow from financing
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activities so so these are the nodes
then the management MDNA and yeah so
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consolidated statement of income here
and
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so total revenues and other income
you can use this number or if you want
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to be more precise then you can just use
total of sales and other operating
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revenues so let's use this alright for
17 let's use this this number and so
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total operating revenues it's going to
be this much and then you need to deduct
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all of that cogs related expenses which
are directly related direct expenses so
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this is going to be the 1 this is going
to be the 1 this is going to be the 1
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and this is going to be the 1 these are
direct expenses we would deduct all
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these expenses and you just leave these
expenses as them like the ones which are
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below exploration expenses so let's just
take this so these are purchase crude
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oil and products operating expenses so
this is basically cogs then these are
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sgna and then exploration finally
exploration expenses so
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earnings before interest tax
depreciation amortization would be this
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less this some of
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all the values so this is going to be
34 billion dollars now so this
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gives us the numerator of our equation
here so this is this is it so alright so
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we have got the EBITA here and
what we're gonna do is now we will be
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calculating the total debt serviceable
number all right so for that you can
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look at the income statement first to
ascertain the interest in debt expenses
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which is here so 307 is an interest in
life debt expense item here you can copy
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this take it here
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alright and then let's go down to the
cash flow statement to find out what all
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debt repayments have has happened in the
in the past one year so you would find
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that information under the head net cash
used for financing activities so this
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this is the particular head financing
activities so now let's see net
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repayments of borrowings of short-term
obligations you might want to take this
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alright
so let's just copy the whole line here
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then again
proceeds from missions of long-term debt
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this is this is not repayment of
long-term debt and other financing
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obligations so yeah so this is this is
the value which we want so you see you
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have got 2 line items which we have
taken from the cash flow statement while
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there was another line item interest in
debt expenses which was taken from the
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income statement so all in all the total
debt serviceable is going to be the sum
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of all the above numbers all right and
this is going to be the denominator for
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our equation now you might want to
include exclude the interest in that
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expenses you know because it is a very
small number but in the interest of you
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know getting a more more transparent
value I have also included this all
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right so now let's just calculate the
DSCR and that's gonna be that's gonna be
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somewhere to the tune of 2.9
times and which is good which is good this
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is this is a good ratio 2.9 times so
that means what the company is having a
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repayment power of 2.9 or 3 times its
debt within a within a single year so
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this gives us a good and a positive
picture of the company all right so this
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was DSCR i hope you've had fun
looking at it I hope you enjoy it
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