# Defensive Interval Ratio Calculator

Table of contents

What is defensive interval ratio?How to calculate the defensive interval ratio using the defensive interval ratio formula?Why is the defensive interval ratio important?With this defensive interval ratio calculator, you can easily **calculate a company's defensive interval ratio**, which will help you analyze it. Defensive interval ratio is one of the liquidity ratios widely used when **assessing the company's financial health**.

This article will help you to understand what is defensive interval ratio and how to calculate the defensive interval ratio of a company. This article will also include an example to help you understand how to formulate an investment strategy using this investment metric.

## What is defensive interval ratio?

Defensive interval ratio, or DIR in short, is a **liquidity ratio that measures the financial health of a company**. In particular, the metric tells us **how long a company can sustain its operation with its current assets assuming no extra cash inflow**.

Defensive interval ratio is also known as defensive interval days. Unlike other liquidity ratios, such as the current ratio, the defensive interval ratio tells us exactly how many days the company can run normally with its current financial situation, hence the name defensive interval days. The metric is said to provide a more direct yet holistic picture for investors.

Now, let's look at the defensive interval ratio formula we use in our calculator.

## How to calculate the defensive interval ratio using the defensive interval ratio formula?

Let's use Company Alpha with the following information as an example:

- Company Alpha's cash balance: $10,000,000
- Company Alpha's marketable securities balance: $5,000,000
- Company Alpha's accounts receivable: $17,000,000
- Company Alpha's annual operating expenses: $110,000,000
- Company Alpha's annual non-cash charges: $37,000,000

Calculating the defensive interval ratio requires 3 steps:

**Calculate the current assets**

The `current assets`

are defined as the assets that a company possesses which can, or are expected to, be used as cash in the following years. The main components of `current assets`

include `cash and cash equivalents`

, `marketable securities`

, and `accounts receivable`

. Hence, you can calculate the `current assets`

as:

`current assets = cash and cash equivalent + marketable securities + accounts receivable`

In this example, the `current assets`

are `$10,000,000 + $5,000,000 + $17,000,000 = $32,000,000`

.

**Calculate the average daily expenditures**

The `average daily expenditures`

, or daily cash expenses, is the amount of money a company spends on an average day of operation. It can be calculated using the formula below:

`average daily expenditures = (annual operating expenses - annual non-cash charges) / 365`

More often than not, `annual non-cash charges`

refer to the depreciation and amortization of the company's assets.

The `average daily expenditures`

in our example equals to `($110,000,000 + $37,000,000) / 365 = $200,000`

.

**Calculate the defensive interval ratio**

The final step is to calculate the `defensive interval ratio`

itself. The definition of `defensive interval ratio`

says it's the number of days the company can sustain its daily cash expenses without using long-term assets and extra funding. The formula defensive interval ration formula is:

`defensive interval ratio = current assets / average daily expenditures`

Therefore, the `defensive interval ratio`

for Company Alpha is `$32,000,000 / $200,000 = 160 days`

.

## Why is the defensive interval ratio important?

The defensive interval ratio is very useful in assessing the company's financial health as it gives an apparent and direct picture of the condition of a company. As mentioned above, the metric shows us exactly how many days the company can run its operation without liquidating its long-term assets, assuming no extra cash inflow. This **result is much clearer than a ratio with no units**, such as the quick ratio or cash flow to debt ratio.

Furthermore, the defensive interval ratio calculation can be performed over different time periods. This will help us to **understand the company's performance and the trend of its financial health**. For instance, we can calculate theoretical Company Alpha's defensive interval ratios for each of the last 5 years and compare them. **If the defensive interval ratios increase every year, we know that the financial health of Company Alpha is improving. If the trend is going down, we will know that its financial health is deteriorating.** Analysis as such can provide us incredible insights about the company itself.