Debt service ratio shows the relationship between net profit and interest payable on loans. This ratio is also called as interest coverage ratio. This ratio is expressed as a pure number.
Purpose:
1) Purpose of this ratio is to measure the interest paying capacity of the company.
2) The purpose of this ratio is to find out the number of times the fixed financial charges are covered by income before interest and tax.
Significance:
1) It is important from the lenders' point of view.
2) It indicated whether the company will earn sufficient profits to pay periodical interest charges.
3) It shows that the company will be able is pay interest regularly.
Formula:
Components:
1) Profit before interest & tax means net profit before payment of interest on loan and tax.
2) Interest means interest on long-term loans.
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