One interesting liquidity ratio is the defensive interval which reflects theoretically how long the company can survive or defend itself in terms of its available cash plus cash equivalent ( most liquid cash) versus its daily cash operating requirement.
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Ratio |
Purpose | Formula |
| Defensive ratio |
|
Average daily cash expenditure for operating expenses ————————–
Company’s most liquid assets |
| Note: Most liquid assets =cash + cash equivalents | ||
| Illustration: ABC Ltd:Annual operating expenses = $365,000 per annum
Current cash & cash equivalents as follows: Cash 60,000 Fixed deposits less than three months 140.000 Marketable securities 100,000 300,000
Defensive ratio =Average daily cash operating expenses/ Most liquid assets =$365,000/365 =$1,000 Daily operating expenses = Annual operating expenses/365 days =$365,000/365=$1,000,00 Defensive Interval = Average =$300,000/$1,000=300 days |
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Interpretation: What it means is that ABC Ltd can continue to be in business without any trade-related activity (additional sales) or new funding (new loans) for 300 days. |
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FCCA,CA(MIA)with more than 26 years of post-qualifying working experiences. Previous working stints with one of the big accounting four, Regional GFC & Group Treasurer in a group of Malaysian and Group CFO in Singapore public listed concern.
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