What Do Cash Flow Available for Debt Service (CFADS) and the Debt Service Coverage Ratio (DSCR) Mean?

What Is CFADS?

CFADS (Cash Flow Available for Debt Service) may be rendered in Turkish as “cash flow available for debt service” or “cash available for debt service”. The concept is of particular importance in project finance, because the lender is less concerned with accounting profit than with the cash flow from which the project or the firm will meet its debt obligations. It is widely used in capital-intensive sectors such as renewable energy, infrastructure, transport, water and wastewater, and telecommunications.

There is no single, invariant formula for CFADS. The calculation may change with the definition in the credit agreement, the structure of the sector and the detail of the financial model. A practical approach in corporate finance is nevertheless as follows:

CFADS = EBITDA − cash taxes − mandatory maintenance/replacement capex − additional cash required for working capital ± other operating cash adjustments

The logic of the formula is to move from EBITDA to the cash that can actually be used to service debt. EBITDA is an accrual measure of operating performance; CFADS approaches cash payment capacity. EBITDA is therefore a useful starting point in debt-capacity analysis, but the direct source of debt service is CFADS.

A CFADS Calculation Example

Suppose the following annual figures for an industrial firm:

Item	Amount (TRY million)
EBITDA	300
Cash taxes	(35)
Mandatory maintenance and replacement capex	(45)
Increase in working capital	(50)
CFADS	170

Although the firm generates TRY 300 million of EBITDA, the cash it can allocate to debt service is TRY 170 million. The gap shows why debt capacity can be misleading if it is set from EBITDA alone. The difference between EBITDA and CFADS can widen in firms with heavy working-capital needs, substantial maintenance capex or large cash tax outflows.

What Is DSCR?

DSCR (Debt Service Coverage Ratio) is a core financial indicator showing the extent to which the cash flow a firm or project can use for debt payments in a given period covers the total debt service due in the same period. For lenders in particular, DSCR is one of the most important ratios used in assessing whether the debt can be repaid.

DSCR is calculated as follows:

DSCR = CFADS / total debt payments

Here CFADS (Cash Flow Available for Debt Service) is the cash flow the firm can use for interest and principal payments. Total debt service is the sum of interest and principal due in the period. Considering interest expense alone is therefore not enough; principal instalments in the repayment schedule must also be included.

Suppose, for example, that a firm’s annual CFADS is TRY 150 million and that combined interest and principal payments in the same period are TRY 100 million. Then:

DSCR = 150 / 100 = 1.50

A DSCR of 1.50 means that the firm generates TRY 1.50 of cash available for debt service for each TRY 1 of debt service. In other words, after meeting its debt payments the firm still has a cash safety margin.

A DSCR of 1.00 means that the cash flow generated covers interest and principal exactly. Any loss of revenue, rise in costs, delay in collections or unexpected cash outflow can then create a debt-service problem. A DSCR below 1.00 means that current cash flow is not enough to meet debt payments. A DSCR of 0.80, for example, means that only TRY 0.80 of cash is generated for each TRY 1 of debt service.

Lenders therefore generally require not only that DSCR be above 1.00, but that it also contain a safety margin. Minimum DSCR levels such as 1.20, 1.30 or 1.50 provide a cushion against the possibility that future cash flows will come in below the forecast. The aim is that debt service remain sustainable even if operating performance deteriorates to some degree.

The acceptable minimum DSCR is not the same for every firm and every sector. The appropriate threshold depends on many factors, including the stability of cash flows, the cyclicality of the sector, the firm’s operating risk, the maturity and repayment profile of the debt, the quality of collateral, the firm’s financial structure and the lender’s risk appetite.

A lower DSCR may be acceptable for businesses whose cash flows are stable and predictable, while a higher DSCR is to be expected for firms whose revenues fluctuate substantially, that are sensitive to economic conditions, or that carry material operating risks.

DSCR should therefore not be treated as a static ratio that merely shows whether the firm can pay its debts in the current period. Its real function is to show whether debt service would remain sustainable even if cash flows deteriorated. In that sense DSCR is an important safety indicator in assessing debt capacity and financial resilience.

The Mathematical Relationship Between CFADS and DSCR

CFADS and DSCR are not independent indicators. CFADS stands in the numerator of DSCR. Changes in CFADS therefore affect DSCR directly so long as debt service is held constant.

DSCR = CFADS / debt service

Debt service = CFADS / target DSCR

This second equality is critical in setting debt capacity. If, for example, the firm’s CFADS is TRY 170 million and the minimum DSCR targeted by the CFO or the bank is 1.50, then:

Maximum annual debt service = 170 / 1.50 = TRY 113.3 million

TRY 113.3 million is not the stock of debt; it is the interest-plus-principal burden the firm can safely meet in that year. Reaching the total amount of debt also requires modelling the interest rate, tenor, principal-repayment schedule and payment frequency.

CFADS and the target DSCR first determine the annual safe debt-service capacity; the stock of debt is then found by applying the interest rate, tenor and principal-repayment profile to that annual capacity.

How Does One Move from Debt Service to the Amount of Debt?

In the previous example the maximum annual debt payment was TRY 113.3 million. If the firm pays interest only and the effective annual interest rate is 40 per cent, the approximate stock of debt is 113.3 / 0.40 = TRY 283.3 million. If, however, the loan is repaid in equal principal instalments over five years, the first year gives rise to about 20 per cent principal and 40 per cent interest, so the simplified first-year debt-service rate approaches 60 per cent. Safe opening debt then falls to about 113.3 / 0.60 = TRY 188.8 million.

Given annual CFADS of TRY 170 million and a minimum target DSCR of 1.50, the maximum annual debt service that can be met safely is:

Maximum annual debt service = 170 / 1.50 = TRY 113.3 million

Under the assumption that the loan is repaid in equal principal instalments over five years, the annual principal payment is:

Annual principal = 188.8 / 5 = TRY 37.76 million

First-year interest is calculated on opening debt of TRY 188.8 million:

First-year interest = 188.8 × 40% = TRY 75.52 million

First-year debt service = 75.52 + 37.76 = TRY 113.28 million

First-year DSCR = 170 / 113.28 ≈ 1.50

Five-Year Debt Service Table

Year	Opening debt	Interest (40%)	Principal	Total debt service	CFADS	DSCR	Closing debt
1	188.80	75.52	37.76	113.28	170.00	1.50	151.04
2	151.04	60.42	37.76	98.18	170.00	1.73	113.28
3	113.28	45.31	37.76	83.07	170.00	2.05	75.52
4	75.52	30.21	37.76	67.97	170.00	2.50	37.76
5	37.76	15.10	37.76	52.86	170.00	3.22	0.00

Amounts are in TRY million. Small differences may arise from rounding.

Year 1. Opening debt is TRY 188.80 million. Interest is 188.80 × 40% = TRY 75.52 million, principal is TRY 37.76 million and total debt service is TRY 113.28 million. DSCR = 170 / 113.28 = 1.50. Closing debt falls to TRY 151.04 million.

Year 2. Opening debt is TRY 151.04 million. Interest is 151.04 × 40% = TRY 60.42 million, principal is TRY 37.76 million and total debt service is TRY 98.18 million. DSCR = 170 / 98.18 = 1.73. Closing debt falls to TRY 113.28 million.

Year 3. Opening debt is TRY 113.28 million. Interest is 113.28 × 40% = TRY 45.31 million, principal is TRY 37.76 million and total debt service is TRY 83.07 million. DSCR = 170 / 83.07 = 2.05. Closing debt falls to TRY 75.52 million.

Year 4. Opening debt is TRY 75.52 million. Interest is 75.52 × 40% = TRY 30.21 million, principal is TRY 37.76 million and total debt service is TRY 67.97 million. DSCR = 170 / 67.97 = 2.50. Closing debt falls to TRY 37.76 million.

Year 5. Opening debt is TRY 37.76 million. Interest is 37.76 × 40% = TRY 15.10 million, principal is TRY 37.76 million and total debt service is TRY 52.86 million. DSCR = 170 / 52.86 = 3.22. Closing debt falls to TRY 0.00 million.

In this example the period that constrains opening debt is the first year. The reason is that, under equal-principal repayment, the principal payment stays the same each year while interest is calculated on the opening balance. Because the balance is highest then, interest is also highest in the first year.

In the first year DSCR is about 1.50, the minimum target. In the second year the balance has fallen to TRY 151.04 million, so interest falls to TRY 60.42 million and DSCR rises to about 1.73. The same mechanism continues in the third, fourth and fifth years: debt service declines and DSCR strengthens.

The expression “40 per cent interest + 20 per cent principal = 60 per cent debt-service rate” is therefore a simplified and conservative approach used only for the first year. It should not be assumed that debt service is 60 per cent of opening debt throughout the five years. Under equal-principal repayment, interest falls each year and so does total debt service.

The example shows that, for the same CFADS and the same target DSCR, total debt capacity can change substantially with the interest rate and the repayment profile. CFADS and DSCR therefore form the core of a debt-capacity model; but when the amount of debt is calculated, the price of the debt and its repayment profile must be added to the model.

A reading of the literature shows that the two concepts complement one another. Looking only at CFADS or only at DSCR therefore leaves the analysis incomplete.

Conclusion

CFADS and DSCR are two complementary core tools of debt-capacity analysis. CFADS shows how much of the cash generated from operations can be allocated to interest and principal; DSCR shows the extent to which that cash covers current debt service. CFADS sets out absolute payment capacity; DSCR sets out the safety margin.

A sound debt analysis should therefore not rest only on balance-sheet and profitability ratios such as net debt/EBITDA. Cash-generation capacity, the interest and principal schedule, maturity structure, exchange-rate risk, refinancing needs and stress scenarios should be assessed together. For the CFO the basic question is not how much the firm can borrow, but how much debt it can still carry without difficulty even if cash flows come in weaker than expected.

References

1. Ardi W., F. A., Arisetiawan, R., Kurniawan, A., & Setyawan, A. (2023). Project financing of “K” asset with reserve-based lending (RBL) method. In Proceedings of the Indonesian Petroleum Association 47th Annual Convention & Exhibition (IPA23-BC-82). Indonesian Petroleum Association. https://www.ipa.or.id/en/publications/search?keywords%5B%5D=82
2. Devapriya, K. A. K. (2003). Donor-intervention and debt capacity in private infrastructure project finance in developing countries. In D. J. Greenwood (Ed.), Proceedings of the 19th Annual ARCOM Conference (Vol. 1, pp. 347-356). Association of Researchers in Construction Management. https://www.arcom.ac.uk/abstracts-results.php?p=19235&title=Project
3. Naumenkova, S., Tishchenko, I., Mishchenko, S., Mishchenko, V., & Ivanov, V. (2020). Assessment and mitigation of credit risks in project financing. Banks and Bank Systems, 15(1), 72-84. https://doi.org/10.21511/bbs.15(1).2020.08
4. Nongena, Y. (2026). How to protect CFADS (& DS) predictability—Focus on each line of P&L statement. In Project financing electricity projects with senior debt: A practical guide (pp. 129-176). Springer Cham. https://doi.org/10.1007/978-3-032-16210-6_4
5. Nongena, Y. (2026). Making CFADS (& DS) predictable—Focusing on each line item of P&L statement. In Project financing electricity projects with senior debt: A practical guide (pp. 69-128). Springer Cham. https://doi.org/10.1007/978-3-032-16210-6_3
6. Nongena, Y. (2026). Profit & loss statement—Essence to distil CFADS, size debt & equity to fund a project. In Project financing electricity projects with senior debt: A practical guide (pp. 25-67). Springer Cham. https://doi.org/10.1007/978-3-032-16210-6_2
7. Nongena, Y. (2026). Project financing electricity projects with senior debt: A practical guide. Springer Cham. https://doi.org/10.1007/978-3-032-16210-6