y12 I=1 consisting of interest and repayment of principal in instalments are covered by the total operating funds available after the payment of taxes: Earnings after taxes, EAT + Interest + Depreciation + Other non-cash expenditures like amortisation (OA). Symbolically, EAT, + Interest, + Depreciation, +04, DSCR (6.17) Instalment, The higher the ratio, the better it is. A ratio of less than one may be taken as a sign of long-term solvency problem as it indicates that the firm does not generate enough cash internally to service debt . In general, lending financial institutions consider 2:1 as satisfactory ratio. Consider Example 6.5. EXAMPLE 6.5 Agro Industries Ltd has submitted the following projections. You are required to work out yearly debt service coverage ratio (DSCR) and the average DSCR: (Figures in Rakh) Net profit for the year Interest on term loan Repayment of term during the year loan in the year 21.67 19.14 10.70 17.64 18.00 15.12 12.60 10.08 18.40 7.56 18.00 7 18.33 5.04 16.41 Nil 18.00 The net profit has been arrived after charging depreciation of 217.68 lakh every year. Year 1 2 3 4 5 6 34.77 36.01 19.20 18.61 18.00 18.00 18.00 18.00