Ratio Defensive Interval

What is the defensive interval ratio’

Defensive interval ratio (dir), also known as defensive period (DIP) or basic defense interval (BIA) is a financial indicator that shows the number of days during which the company can work without access to non-current assets long-term assets whose value can not be obtained in the current reporting year, or additional external financial resources. The DIR is sometimes seen as the ratio of financial efficiency, but most often is considered a liquidity ratio.

Destruction of a guard interval ratio’

The formula to calculate the DIR is:

Dir (expressed as number of days) = current assets / daily operational expenses

Current assets = cash + marketable securities + net receivables

Daily operating costs = (annual operating costs – noncash expenses) / 365

The deer, according to some market analysts to be more useful than a standard liquidity ratio quick liquidity ratio or the current ratio is due to the fact that he compares asset costs, rather than comparing assets to liabilities. The DIR is usually used as an additional financial ratio analysis, along with the current or quick liquidity to assess financial health, as it can vary significantly from DIR and quick, or current liquidity ratio values, for example, if a company has a large number of expenses, but practically no debt.

The DIR is called a guard interval ratio, because its calculation uses the current assets of the company, also referred to as 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 receivables (AR). For example, if a company has $100,000 cash on hand, $ 50,000 of liquid securities as well as $50,000 in receivables, it has a total of $200,000 in protective assets. If the daily operating expenses equal $5,000, the value DIR-40 days – 200,000 / 5,000.

The value of the ratio defensive interval

The directory is a useful tool in the assessment of financial health because it provides a real world metric of how many days the company can work from the point of view meet the daily operating expenses without facing any financial difficulties that will likely require access to additional funds through new equity investment, Bank loan or selling long-term assets. In this respect, can be considered a more useful measure of liquidity for study than the current ratio, which is providing a clear comparison of the company’s assets to its liabilities, does not give any specific instructions about how long the organization can function financially without encountering serious problems from the point of view just to work from day to day.

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