Defensive Interval Ratio (DIR)
Defensive Interval Ratio is a ratio that measures the number of days a company can operate without having access to non-current assets. This ratio compares the assets to the liabilities instead of comparing assets to expenses. Defensive Interval Ratio or DIR is a good way to find out if the company is a good investment for you or not. Defensive Interval Ratio is also called as Defensive Interval Period.
By definition, Defensive Interval Ratio is an efficiency ratio that measures how many days a company can operate without having to access non-current or long term assets.
Formula to calculate Defensive Interval Ratio
The defensive Interval Ratio can be calculated using the formula
DIR = Current Assets / Daily Operational Expenses
The output is displayed in days.
The defensive assets are all the assets that you can sell which you can make use of whenever you need them by selling them or also the amount that is owed to you by a defaulter. To calculate defensive interval ratio you can also make use of the formula
Defensive assets – Non-cash charges
If your company has cash in hand $50,000, access to bonds in $25,000 and you are expecting receivables of $25,000 from debts and other such incomes, providing you a total of $100,000, your daily cost of sales and other operating expenses and other monetary requirements amount you $1000 per day would give you a daily expenditure of 100 days.
Another example to illustrate Defensive Interval Ratio: Cash in hand $30,000, securities $38,000, receivables $46,000 and the projected annual expense of $450,000 and non-cash charges of 20,000 would provide you with the defensive interval ratio of 95 days.
$114,000/($450,000-$20,000)/360 = $114,000/1,194.44= 95 days.
Defensive interval ratio is a liquidity ratio that allows your company the ability to meet the daily expenses of the business or the debts. Your current liquid assets are sufficient to help your business last without seeking outside revenues. The projected daily expenses of the company are determined by dividing the cost of the goods sold and all the operating expenses and cash expenses by 360.The ability of a business to survive on the liquid assets alone makes it a standing company which can manage to run on its own without having to make use of either investments from the market or by selling long term assets. This shows how strong the company is in the market.
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