How is the Debt Service Coverage Ratio (DSCR) calculated?

The Debt Service Coverage Ratio (DSCR) is a key metric used to assess an entity's ability to cover its debt obligations with its operating income. The correct calculation involves dividing the net operating income by the total loan payments.

Net operating income represents the income generated from operations before any financing costs, taxes, or extraordinary items, while total loan payments include both principal and interest payments on a loan. By calculating the DSCR in this manner, it provides insight into how well the income generated by an investment or business can cover its debt obligations; a ratio greater than 1 indicates that the entity has sufficient income to meet its debt payments.

In contrast, the other options either misrepresent the relationship between income and debt service or do not focus on the relevant financial metrics needed to evaluate financial health in terms of debt repayment capability. Thus, the ratio established in option A accurately reflects the purpose and utility of the DSCR.