The debt coverage ratio is used to determine whether or not a company can turn enough of a profit to cover all of its debt. This is also often referred to as the debt service coverage ratio (DSCR). Typically banks and lenders use this formula to decide whether or not to award a company a business loan.
If the company has any loans or credit lines on their account, this ratio would certainly be applicable. Additionally, this ratio can also be used by the individual company as an evaluation of their ability to cover their debts.
For example, let’s say that a company wants to take on more debt to feed growth. But they want to figure out if they can safely take on that debt without serious risk to the health of the company. This would be a great use of the debt coverage ratio.