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DSCR (Debt Service Coverage Ratio) - Explained in Hindi | #40 Master Investor - YouTube

Channel: Asset Yogi

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to watch the latest finance videos before all.

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Namaskar! My name is Mukul and welcome to Asset Yogi.

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in this video, we are going to discuss another solvency ratio

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whose name is debt service coverage ratio.

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In short, we also call it DSCR.

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This video is part of a series in which we're discussing the solvency ratio.

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In the last video, we covered the interest coverage ratio.

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If you haven't watched that video, then watch it.

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You'll get the link in the description below.

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In it, we saw how many times of annual interest payment does a company earn?

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We understand that by interest coverage ratio.

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Now when we talk about DSCR,

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Then we want to know how comfortable a company is

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to pay total debt payments.

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Annual debt payment, in which both principal and interest portion both come.

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Now, whenever you go to take a loan in any bank,

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Then it studies whatever your cash flow is, and it takes out and sees your DSCR,

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how easily will you be able to pay your loan?

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Means will you be able to do payments easily or not?

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That's why understanding the ratio becomes important.

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So how does its calculation is done?

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How its interpretation is done? We'll understand that in this video.

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And in last I'll also show a live demonstration that,

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how can we calculate DSCR os a company online?

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So watch this video till last. Let's go straight to the blackboard.

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So as I said before, by Debt Service Coverage Ratio we know

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that if a company has sufficient cash flow

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to meet its debt obligations.

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Now, what are debt obligations?

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This is the annual principal plus interest payment.

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See, whenever you take a loan, you pay its EMI. Right!

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What are these principal and interest components?

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You're basically paying 12 EMI of a year.

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Add those and you'll get principal and interest of the year.

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Now, what is the formula of Debt Service Coverage Ratio?

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This is operating profit divided by debt service.

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Now, let's come to what is operating profit?

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We've already talked about Debt Service.

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You have to add principal payment and interest payment,

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Whatever your annual payments come to be.

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Now see, whenever we talk about operating profit,

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there is the most confusion. We see 2-3 kinds of formulas.

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Let's take a hypothetical example.

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I've taken out a portion of the income statement.

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Take out all the expenses from the revenue

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so you get EBITDA

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Earnings Before Interest, Taxes, Depreciation, and Amortization

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So this is 1 crore and 10 lakhs.

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You took out depreciation of 10 lakhs.

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Assume amortization to be zero.

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So you get the earnings before taxes.

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This is your operating profit. We talked practically about this.

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In my video of EBIT and EBITDA, I talked about this.

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You can watch that video.

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After this, you take out the interest component,

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then you get profit before tax.

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Then you take out taxes. I assumed approximately 30%.

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Then you get profit after tax,

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which we also call net profit.

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Now if our operating profit is EBIT, then

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we can do EBIT divided by debt service here.

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This formula is used in many places. Some banks also use it.

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This is a bit conservative formula.

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When banks want to be safer, they can use this kind of formula,

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and some analysts also use this formula,

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cause they basically want to play it safe.

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What do most banks do? They say

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that depreciation and amortization are non-cash expenses.

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The company has cash lying around,

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the company can use it for debt payment.

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What is depreciation? Ultimately it's an adjustment. Whatever assets you've made

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you're depreciating them, but actually, you have those 10 lakh Rs in the account. RIght!

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So you can do your debt service with that.

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That's why EBITDA is used. This is a bit liberal formula.

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Generally, EBITDA is used when banks use it.

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But there is a catch in it too.

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In EBITDA you'll see,

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I showed you these two formulas in interest coverage.

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It was good till there.

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Because we were talking about only interest payment there.

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There is a principal payment too in your debt service.

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The principal payment is non-tax-deductible

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I am going to write it here.

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Non-tax-deductible.

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What does Non-tax-deductible mean?

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There is no tax benefit on it.

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Here whatever interest payment you are doing,

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You're getting direct tax benefit on that.

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You are removing the tax component from EBIT

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So whatever is the remaining profit before tax,

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you're giving tax on that. Right!

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But the principal component is not tax-deductible.

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So ideally what do we need to do? We should not use this tax component.

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So when we are talking about operating profit,

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then there should be no tax component in it.

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So that's why, if we talk about the ideal formula,

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then the ideal formula is, to take profit after tax in the first place,

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add interest component in it,

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add depreciation and amortization.

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So profit after tax plus interest plus depreciation plus amortization

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that's the operating profit you'll take in the numerator.

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Then it becomes the ideal formula.

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So in my opinion, ideally this formula should be used if we calculate DSCR.

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Let's try to do a quick calculation.

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Profit after tax, interest, depreciation, amortization are here

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What do we have to calculate?

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We have to calculate how much is the debt service?

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We already saw the interest component in debt service.

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That is 20 lakhs.

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Other than that we need the principal component.

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Assume the principal component is 10 lakhs.

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If we add it here, we get a debt service of a total of 30 lakhs.

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Now if we calculate our DSCR here,

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then, first of all, we'll write profit after tax.

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that's 56 lakhs, we took it from here.

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What do we need now? We need the interest component.

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That is 20 lakhs, so I'll write 20 lakhs here.

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Plus depreciation and amortization are totals of 10 lakhs, so I'll write 10 lakhs here.

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Divided by, we'll write debt service, which is 30 lakhs.

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So basically in the numerator, it is 86 lakhs, divided by 30 lakhs.

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If you do the calculation, then it comes to be 2.87.

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Now the question arises that this 2.87

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is it a good figure or a bad figure?

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Let's quickly understand it once.

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So see, when we talk about DSCR, if DSCR is less than,

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that means the company has

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The company is not generating enough operating profit to even cover the debt service.

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So basically the company which has less than 1 DSCR,

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it cannot service its debt obligations.

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Now, what should be the ideal DSCR?

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So any bank wants to see your DSCR between 1.5 to 2.

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This means different banks have different requirements.

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Some banks give loans at 1.5,

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while some require a minimum of 2.

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Also, it depends on the industry as well.

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If an industry has stable cash flows,

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for example, power industry or infrastructure,

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where long-term contracts happen,

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low DSCR can also be considered there.

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Otherwise,

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in normal industries, banks consider a minimum DSCR of 1.75,

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because they want to keep a cushion.

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So basically higher DSCR is good.

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And what does this basically indicate?

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Your solvency is stronger, you can easily pay your debts.

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Any company will pay its debt easily

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then there won't be chances of getting bankrupt.

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That is the meaning of solvency.

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So basically the company won't be insolvent.

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And what is the other benefit of having good DSCR?

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If DSCR is more than 2, that means the company

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can borrow money at competitive interest rates. it gets good interest rates.

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And it gets good loan terms. Assume if

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DSCR of a company is less than 1.5

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and the minimum requirement of the bank is 1.5,

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then the bank will hesitate in giving you a loan.

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and even if it gives the loan, the interest rate will be high.

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So broadly this was the talk about the concept and calculation of DSCR.

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How should we calculate DSCR online? Let's see that too.

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So pay attention to calculation online,

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because you don't get principal payment directly from the website.

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So we'll have to take out the annual report of a company.

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So quickly let's see that too.

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So what did I do first? I took out the financials of Tata Steel

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from the money control website.

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You can take out the financials of any company by searching.

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Here on the left side, you get all the financial statements.

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What do we have to do? After going into the profit and loss statement,

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we get profit after tax, interest, and depreciation.

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So we came here. I am basically

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seeing the consolidated statement of march 2018

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What do we need?

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Firstly we need profit after tax.

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Let's see how much profit after tax we're getting.

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You get the figure of profit after tax here.

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You get the interest component as well.

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This finance cost is the interest component.

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Then you also get depreciation and amortization from here.

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So we got all the figures of the numerator from here.

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Now the question arises,

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where will we get the interest and principal component?

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The interest we saw, we got it from here.

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Now, where will we get the principal component from?

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You get the principal component from the cash-flow statement.

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You get it from the cash flow from financing activities.

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So see, what happened here is that net cash used from financing activities,

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they have given a consolidated number here.

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You are not getting the principal component.

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Then I checked the second website also.

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I checked the India infoline website,

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Here also you don't get the principal component separately.

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SO what will you have to do?

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You'll have to basically see the annual report of the company

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you want to calculate DSCR of.

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So I got the annual report of Tata Steel from google.

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I went to the Tata Steel website and downloaded the pdf here.

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So here I came on the annual report of Tata Steel.

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and I've taken out the consolidated statement of profit and loss.

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And basically, on which page is this, you can check it.

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It's on page number 282.

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So see, what are we getting here? I'll write along with these figures.

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We have to see the profit after tax from continuing operations.

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We don't need profit after tax from discontinued operations.

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The profit after tax is 17704 crores.

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What do we need after that? Finance cost.

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We got the finance cost from here, 5502 crores.

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After that, we need depreciation and amortization,

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which is 5962 crores

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So our numerator is complete from here.

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Now we'll come down. We need cash flow activities.

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What will we get from cash flow? We'll get the principal component from it.

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Interest component we've already seen.

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So see, the cash flow statement is here.

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First is operating activities and then investing activities.

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And then we come down to financing activities.

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In financing activities, we have to see the principal component.

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So principal component is basically repayment of borrowings.

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So this repayment of borrowings,

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short-term and long-term debt both are given in it. So basically

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total repayment of current debt and non-current debt is happening.

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We're talking about the total principal payment here.

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In some companies' cash flow statements,

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in the annual report, current, and non-current

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repayment, you can get separately.

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You have to add in that case. Here we're getting combined so I'll take that.

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So let's do the calculation. We had seen the formula of DSCR.

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We needed profit after tax plus interest plus

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depreciation and amortization.

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Divided by we need debt service.

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What was out a profit after tax? 17704 crores.

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Plus what was our interest? 5502 crores.

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Plus depreciation and amortization we saw 5962 crores.

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We'll divide all this

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What is our debt service? what is the principal? 19725.

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So this is 19725.

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Plus we have to add the interest component to it.

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How much is the interest component? 5502.

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So when you do the calculation,

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Then your DSCR comes out to be around 1.15

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Now let's see the interpretation of this 1.15 DSCR,

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this is actually very low.

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Even if banks think about giving loans again

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they'll think that DSCR is very low.

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Don't know if the company will be able to pay back the loan.

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So according to banks, Tata Steel may have problems in getting a loan.

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So you can analyze any company like this.

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So I hope, the concept of DSCR is clear to you,

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and the calculation would be understood too.

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That's all for this video.

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If you enjoyed this video then do like and share.

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If you have any suggestions or you want to give feedback

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