What is Debt Service?
Debt service is a term given to mean the amount of principal and interest a business pays on a loan. Debt service is normally referred to on an annual basis but can be for any period.
As an example of how to calculate debt service, suppose a business has a loan of 120,000 repaid over 10 years in equal installments at an interest rate of 6%, then the principal and interest repayments for each year would be 16,304. The business would say that it’s debt service is 16,304.
The ability of a business to service its debt is estimated by comparing cash flow with its required debt repayments.
For further information on the ability to service debt see the Wikipedia definition.
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