Commercial Loan Basics

Earnings before interest and taxes (EBIT):

A measure of a firm’s profitability that excludes interest and income tax expenses.
EBIT = Revenue – Operating Expenses + Non-operating income(non related gain or loss)
$85,000 = $100,000 – $25,000 + $10,000

Net Operating Income (NOI):

A company’s operating income after operating expenses are deducted, but before income taxes and interest are deducted. If this is a positive value, it is referred to as net operating income, while a negative value is called a net operating loss (NOL).
NOI = Revenue – Operating Expenses
$100,000 – $25,000 = $75,000

Debt Service Coverage Ratio (DSCR):

Also known as “debt coverage ratio,” is the ratio of cash available for debt servicing to interest, principal and lease payments. It is a popular benchmark used in the measurement of an entity’s (person or corporation) ability to produce enough cash to cover its debt (including lease) payments. The higher this ratio is, the easier it is to obtain a loan. The phrase is also used in commercial banking and may be expressed as a minimum ratio that is acceptable to a lender; it may be a loan condition or covenant. Breaching a DSCR covenant can, in some circumstances, be an act of default.
DSCR = NOI / Total Debt Service
1.25 = 50,000 / 40,000

Cap Rate (CAP):

Capitalization rate (or “cap rate”) is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value. The rate is calculated in a simple fashion as follows
CAP = annual net operating income / cost or value
10% =.10 = 1,000,000 / 100,000

Pre-Tax Operating Income (PTOI):

Pre-Tax operating income is a measure for the condition of a business. PTOI calculates both revenue and expenses associated with a company’s primary business activities. Given taxes must ultimately be subtracted from this total, analyzing the company’s primary operations on a pretax basis gives its shareholders and decision-makers a clearer picture into the aspects of profitability that the company can produce. It’s also important to note that PTOI helps eliminate a false sense of security or panic associated with certain infrequent occurences like lawsuits, gains or losses on currency exchanges, or the appreciation of capital assets. As these are included in the final accounting of a company’s profit or loss, they can create a false sense of security or peril.
PTOI = PBA Income – PBA Expenses
1000 = 4000 – 3000