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Defensive Interval
Published by slang April 25th, 2007 in For Companies, Ratio Analysis
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.
|
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 |
||
|
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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