Debt ratios are statistics that provide a measure of an issuer’s outstanding debt in relation to various other economic or demographic factors. Rating agencies may use these ratios to determine the credit quality of the issuer or an individual bond issue.
Common ratios include:
· debt per capita: the issuer’s total outstanding debt divided by its population.
· debt service coverage: the ratio of revenues available to pay annual debt service – principal and interest – to the amount actually needed for debt service. For example, if an issuer will pay $15 million annually in debt service and has $20 million to do so, its coverage ratio is 1.33.
· interest coverage: similar to the debt service coverage ratio, the interest coverage ratio considers the ratio of revenues available to pay annual debt service to the amount needed for interest payments.