The formulas
- Liquid assets = cash + securities + net receivables
- Cash operating expenses = operating expenses - noncash expenses
- Defensive interval = liquid assets / (cash operating expenses / days)
How it works
The defensive interval ratio shows how long the entity could keep operating from liquid assets if no new revenue arrived. It is a useful going concern analytic because it compares liquidity to the cost base instead of to current liabilities.
Use cash operating expenses, which strips out depreciation and other noncash charges. A short and shrinking interval across years is a reason to ask management for cash flow forecasts and to test covenant compliance.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
Should interest be included?
Include it if you want a full cash burn view. Exclude it for an operating view. Be consistent.
Does it replace the quick ratio?
No. They answer different questions, and both are worth computing.
Which period should I use?
The same year as the balance sheet date, for consistency.
Formulas on this page are the standard definitions.
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