The debt coverage ratio is a measure of the ability of an entity to generate income to cover its debts, and it is calculated by dividing the net operating income by the debt service. The ratio is used by internal groups and financial institutions to determine the viability of lending.
Net operating income is found on a company's income statement, and it is the revenues minus operating expenses. It takes into account taxes, debt expenses and income not earned from normal operating activities. Financial institutions generally have metrics pertaining to the debt coverage ratio to determine whether a business or consumer loan is viable.