Defensive Interval Ratio (Formula, Examples) | Calculation

In this video on Defensive Interval Ratio, we are going to see what Defensive Interval Ration mean? including its formula, calculation and examples.

𝐖𝐡𝐚𝐭 𝐢𝐬 𝐃𝐞𝐟𝐞𝐧𝐬𝐢𝐯𝐞 𝐈𝐧𝐭𝐞𝐫𝐯𝐚𝐥 𝐑𝐚𝐭𝐢𝐨?
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This is one of the interesting ratio to be considered. Defensive Interval ratio explains how many days a company can operate without using its non current assets.

𝐅𝐨𝐫𝐦𝐮𝐥𝐚 𝐃𝐞𝐟𝐞𝐧𝐬𝐢𝐯𝐞 𝐈𝐧𝐭𝐞𝐫𝐯𝐚𝐥 𝐑𝐚𝐭𝐢𝐨
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Defensive Interval Ratio (DIR) = Current Assets / Average Daily Expenditures

𝐃𝐞𝐟𝐞𝐧𝐬𝐢𝐯𝐞 𝐈𝐧𝐭𝐞𝐫𝐯𝐚𝐥 𝐑𝐚𝐭𝐢𝐨 𝐄𝐱𝐚𝐦𝐩𝐥𝐞
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Mr X has been investing in business for a while. And he wants to understand how Company Y is doing in terms of liquidity. So Mr X looks at Company Y’s financial statements and finds the following info-

Particulars of Company Y at the end of 2017

Cash: 40,00,000
Marketable Securities: 31,00,000
Trade Receivables: 800,000
Average Daily Expenditure: 300,000

Now, how he will find the Company Y's liquidity?
It is very simple. here we only need to apply the formula, since all the information is already given.

Here will use the Defensive Interval Ratio.

Defensive Interval Ratio (DIR) = Current Assets / Average Daily Expenditures

Here current assets include - Current Assets (which can get easily converted into liquidity) = Cash + Marketable Securities + Trade Accounts Receivable

Now, Lets calculate the Defensive Interval Ratio

= (40,00,000 + 31,00,000 + 800,000) / 300,000
= 26 Days

As per the calculation, Mr X finds that the liquidity position of Company Y is not good and he decides to look into other aspects of the company.