What does net revenue divided by debt service represent?

Prepare for the CPFO Debt Management Exam. Study effectively with flashcards and multiple choice questions, complete with hints and detailed explanations. Get exam-ready!

Net revenue divided by debt service represents the debt service coverage ratio (DSCR). This ratio is a critical indicator used by lenders and financial analysts to assess an entity's ability to meet its debt obligations from its operating revenue. A higher DSCR indicates more cash flow is available to cover debt payments, which reduces the risk associated with lending and is often viewed favorably by investors and creditors.

In practice, a debt service coverage ratio greater than 1 suggests that net revenues sufficiently cover debt obligations, while a ratio of less than 1 indicates that the organization may not generate enough revenue to meet its debt service requirements. This metric is crucial for evaluating financial stability and sustainability in both public and private sector entities.

The other options, while related to financial analysis, measure different aspects of financial health or risk. The debt yield ratio focuses on the yield an investor can expect based on the property's net operating income relative to the total loan amount. The liquidity ratio assesses the ability of an entity to meet its short-term obligations, and the asset-to-debt ratio evaluates the proportion of total assets financed by debt, none of which directly relate to the cash flow available for debt servicing.

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