Key Financial Indicators: Debt Service Coverage Ratio

<p>In previous posts, we have discussed where to find data to help make smart financial and managerial decisions. Another vital data source for any enterprise is its own financial statements, from which enterprises can calculate key financial indicators.  In March, we discussed operating ratio.  This post will discuss another key financial indicator–debt service coverage ratio.</p> <p>Debt service coverage ratio is an important indicator for many aspects of community and economic development.  For this blog, let’s look at key financial indicators from the perspective of a business-like unit within government–a water or wastewater system.  Key financial indicators are a way for that enterprise to get a snapshot of its financial health and to determine whether it needs to make adjustments to its rates, and they should be calculated annually when financial statements are released.  Debt service coverage ratio, as the name suggests, measures the system’s ability to pay its long-term debts.</p> <div class="post-content"> <div class="pf-content"> <p>Debt service coverage ratio is calculated by dividing annual net operating revenues (calculated by subtracting total operating expenses excluding depreciation from total operating revenues) by the system’s annual principal and interest payments on all long-term debt. If the system is owned by a government that follows GASB 34 procedures for audited financial statements, the operating revenue and operating expense numbers can be found on the Statement of Revenues, Expenses, and Changes in Fund Net Assets for the proprietary fund, and the principal and interest on long-term debt can be found on the Statement of Cash Flows.</p> <p>A debt service coverage ratio of 1.0 means that the [...]</p></div></div>