A higher Debt Service Coverage Ratio (DSCR) indicates
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Better ability of the company to meet its cash commitments
Option (1) Inability of company to meet cash commitments. — Incorrect. A high ratio means cash profits are large compared with what must be paid. That shows ability, not inability.
Option (2) Better ability of the company to meet its cash commitments — Correct. The more cash profit there is for each rupee of debt payment, the more easily the company can pay.
Option (3) No change in company’s potential regarding the debt component in its capital structure. — Incorrect. A higher DSCR does change it. A company that can pay more easily is able to take more debt.
Option (4) Company’s potential to reduce the debt component in its capital structure — Incorrect. It works the other way. A higher DSCR shows the company’s potential to increase the debt component, not to reduce it.
NCERT (2026-27 Edition): “3. Debt Service Coverage Ratio (DSCR): Debt Service Coverage Ratio takes care of the deficiencies referred to in the Interest Coverage Ratio (ICR). The cash profits generated by the operations are compared with the total cash required for the service of the debt and the preference share capital. …” “A higher DSCR indicates better ability to meet cash commitments and consequently, the company’s potential to increase debt component in its capital structure.” |