## What is the 'Defensive Interval Ratio'

The defensive interval ratio (DIR), also called the defensive interval period (DIP) or basic defense interval (BDI), is a financial metric that indicates the number of days that a company can operate without needing to access noncurrent assets, long-term assets whose full value cannot be obtained within the current accounting year, or additional outside financial resources. The DIR is sometimes viewed as a financial efficiency ratio, but is most commonly considered a liquidity ratio.

## BREAKING DOWN 'Defensive Interval Ratio'

The formula for calculating the DIR is:DIR (expressed as number of days) = current assets / daily operational expenses

Current assets = cash + marketable securities + net receivables

Daily operational expenses = (annual operating expenses - noncash charges) / 365

The DIR is considered by some market analysts to be a more useful liquidity ratio than the standard quick ratio or current ratio due to the fact that it compares assets to expenses rather than comparing assets to liabilities. The DIR is commonly used as a supplementary financial analysis ratio, along with the current or quick ratio, to evaluate a company's financial health, since there can be substantially different DIR and quick or current ratio values if, for example, a company has a large amount of expenses but little or no debt.

The DIR is called the defensive interval ratio because its calculation involves a company's current assets, which are also known as defensive assets. Defensive assets consist of cash, cash equivalents such as bonds or other investments, and other assets that can readily be converted to cash such as accounts receivables (AR). For example, if a company has $100,000 cash on hand, $50,000 worth of marketable securities, and $50,000 in accounts receivables, it has a total of $200,000 in defensive assets. If the company's daily operational expenses equal $5,000, the DIR value is 40 days - 200,000 / 5,000.

## Importance of the Defensive Interval Ratio

The DIR is a helpful tool in evaluating a company's financial health because it provides the real world metric of how many days the company can operate in terms of meeting daily operational expenses without running into any financial difficulty that would likely require it to access additional funds through either new equity investment, a bank loan or the sale of long-term assets. In that respect, it can be considered a more useful liquidity measure to examine than the current ratio, which, while providing a clear comparison of a company's assets to its liabilities, does not give any definitive indication of how long a company can function financially without encountering significant problems in terms of simply operating day to day.