ShmoopTube

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Finance, a la shmoop. What is debt service and debt service ratios? Well debt

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service is just the interest you pay on debt in a given year. Like you're [Definition written on a 100 dollar bill]

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servicing the debt, like think about the oil demanded by a robot in a year she

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demands to be serviced and the oil you serve her will you know quench her [Robot drinking oil]

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thirst. Well debt service can be easy or it can

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be hard, like whatever.com has 50 million bucks of 6 percent debt costing 3 [The debt service calculation is shown]

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million a year to service. Well if whatever.com had 40 million bucks in [Vault full of money]

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cash profits servicing its debt would then be easy and it would have a debt [Someone repeatedly pressing an easy button]

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service ratio of 40 over 3 or 13 and 1/3 times coverage. Said another way the odds [The ratio calculation is shown]

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that whatever.com would find itself in a position that it couldn't service

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its debt are well very low. But think about the other side of the coin if [Somone about to flip a coin]

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whatever.com had only 4 million dollars in cash profits well then it's debt

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service ratio is 4 over 3 meaning that 75% of its cash flow leaves the company [Money going from whatever.com to the lenders]

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and goes into the coffers of the kindly loving lenders who are nervous about the

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company falling into default and going bankrupt which does not make the oil go

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down easy... [Robot drinks oil and spits it out]

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