What is the defensive interval ratio
The Defensive Interval Ratio (DIR), also known as the Defensive Interval Period (PID) or Basic Defense Interval (BDI), is a financial measure of the number of days a business can operate without the need for ” access non-current assets, long-term assets whose full value cannot be obtained during the current financial year, or additional external financial resources. The DIR is sometimes considered as a financial efficiency ratio, but it is most often considered as a liquidity ratio.
DEFAULT Defensive Interval Ratio
The formula for calculating the DIR is as follows:
DIR (expressed in number of days) = current assets / daily operating expenses
Current assets = cash + marketable securities + net receivables
Daily operating expenses = (annual operating expenses – excluding cash costs) / 365
The DIR is considered by some market analysts to be a more useful liquidity ratio than the standard quick ratio or the current ratio due to the fact that it compares assets to expenses rather than comparing assets to liabilities. The DIR is commonly used as an additional financial analysis ratio, along with the current or rapid ratio, to assess the financial health of a business, as there may be significantly different DIRs and rapid or current ratio values if, for example. For example, a business has a large amount of expenses but little or no debt.
The DIR is called the defensive interval ratio because its calculation involves the current assets of a company, also called defensive assets. Defensive assets consist of cash, cash equivalents such as bonds or other investments, and other assets that can be easily converted to cash such as accounts receivable (AR). For example, if a business has $ 100,000 in cash, $ 50,000 in marketable securities and $ 50,000 in accounts receivable, it has a total of $ 200,000 in defensive assets. If the company’s daily operating expenses are $ 5,000, the DIR value is 40 days – 200,000 / 5,000.
Importance of defensive interval reporting
The DIR is a useful tool for assessing the financial health of a business, as it provides the actual measure of the number of days the business has been in operation in terms of meeting daily operational expenses without encountering financial difficulties that would probably require it to access additional funds. either by new equity investments, a bank loan or the sale of long-term assets. In this respect, it can be seen as a more useful measure of liquidity to examine than the current ratio, which, while providing a clear comparison of a company’s assets with its liabilities, gives no definitive indication of the length of time over which a business can operate financially without encountering significant problems in terms of day-to-day operations.