Definition:
The ratio measures debts servicing capacity of
a business so far as interest on longterm loans is concerned. This ratio shows
how many times the interest charges are covered by the earnings. Debt
service ratios is also know as interest coverage ratio.
Formula:
The ratio is calculated with following formula:
Debt service ratio = Earnings
before interest and taxes (EBIT) / Fixed interest charges
Example:
From the following, calculate interest coverage
ratio.

$ 
9% Mortgage loan 
10,00,000 
7.5% Debentures 
12,00,000 
Net profit (after tax) 
9,72,000 
Income tax rate 
50 % 
Solution:
Interest coverage ratio =
Earnings before interest and tax / Fixed interest charges
= 21,24,000*
/ 1,80,000**
11.8 times
Working:
(i) Calculation of Interest
Payable:
(l0,00,000 × 9 /
100 ) + (12,00,00 ×
15 / 2 ×
1 / 100)
90,000 + 90,000
= $1,80,000**
(ii) Calculation of Tax
Liability:
Tax rate = 50%
Profit after tax = 972,000
Tax amount = [9,72,000 / (100 
50)] x 50
= 9,72,000
(iii) Profit before Interests
and Tax:
= Profit after tax + Tax +
Interest
= 9,72,000 + 9,72,000 + 1,80,000
= 21,24,000*
Comments:
Net profits available for payment of interest
are approximately 12 times. It implies that even if earnings decline to 1/11^{th}
of the current figure longterm creditors interest repayments is safe. 