Defensive Interval Ratio
Candlefocus EditorTo calculate a company's defensive interval ratio (DIR), the total liquid current assets and the average daily expenses need to be determined. Liquid current assets include inventory, cash on hand, and any easily liquidated securities or investments. Average daily expenses include all operating costs, such as payroll, costs of goods sold, taxes, and other short-term expenses. Once these figures are determined, the DIR can be calculated by taking the total liquid current assets divided by the average daily expenses.
The results of this calculation will give investors a good idea of how long a company could remain in operation without additional funding. The higher the number, the longer the company could maintain operations without needing additional financial assistance. For instance, a company with a DIR of 3 would be able to operate for three days with just their liquid assets.
The defensive interval ratio (DIR) is an important tool used to evaluate a company's liquidity, and can provide additional insight when used in conjunction with other ratios such as the quick ratio or current ratio. The DIR can pinpoint potential problems with cash flow more accurately than other measures, but there is no specific number that should be aimed for as it will vary depending on the size, industry, and financial strategy of each company. Investors can be sure that a higher DIR is preferable, as it indicates a stronger liquidity position and greater ability to remain in operation.