Defensive interval ratio is a variation of the quick ratio. The ratio uses the same figures used by the quick ratio to determine whether a business has an ability to pay its bills and liabilities. The aim of this ratio is calculate a defensive interval that is required by the company to pay its bills. There are no exact number of days in the interval instead the ratio examine whether the defensive interval is declining or not. The length of the defensive interval shows whether the current assets are sufficient for the business to pay its bills and liabilities. If the defensive interval is declining that means that buffer of liquid assets of the company that are being used to pay the bills are gradually declining.
There are a number of financial figures required to calculate defensive interval ratio. These figures include amounts of cash available with the business, marketable securities of the business and trades accounts receivable that are currently present within the business. The formula can be shown as under:-
Defensive Interval Ratio = Cash+ Marketable Securities + Trade Receivables /Average Daily Expenditure
There are a number of issues associated with the calculation of defensive interval ratio such as expenditure inconsistency within the business and receivable replenishment trend in the business along with the receipt inconsistency within the business.
An example of defensive interval can be seen as the example of a company ABC that is suffering through a cyclic decline within the industry. The calculation of defensive interval for the company can be done with following information:-
Cash within hand = $1, 200, 000
Marketable Securities = $ 3, 700, 000
Trade Receivable = $4, 100,000
Average Daily Expenditure = $ 138, 500
Defensive Interval Ratio = 1,200,000 + 3,700,000 + 4,100,000 / 138,500
= 65 Days
This means that the company has sufficient amount of cash for keep operating for 65 days.
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