Moneyzine
Contents
/Investment Guides /Defensive Interval

Defensive Interval

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
September 19th, 2023
Advertiser Disclosure

Definition

The term defensive interval refers to the number of days a company is able to operate using only its liquid assets. The defensive interval compares highly liquid assets to the company's expected daily operating expenses.

Calculation

Defensive Interval = Liquid Assets / Daily Operating Expenses

Where:

  • Liquid assets is calculated as cash plus marketable securities plus accounts receivable minus anticipated uncollectibles associated with the accounts receivable balance.

  • Daily operating expenses are the anticipated operating expenses over a fairly large timeframe such as the next 30 to 60 days.

Explanation

Liquidity measures allow the investor-analyst to understand the company's long term viability in terms of fiscal health. This is usually assessed by examining balance sheet items such as accounts receivable, use of inventory, accounts payable, and short-term liabilities. One of the ways to understand the overall liquidity position of a company is by calculating their defensive interval.

As is the case with other liquidity metrics, the company's accounts receivable is adjusted for anticipated uncollectibles expense. The defensive interval allows the investor-analyst to understand the number of days liquid assets can support operating expenses. While the metric is a ratio, the outcome is stated in days. The investor-analyst will want to track this metric over time to see if there is a change in the company's liquidity position.

Example

The manager of a large mutual fund would like to assess the liquidity position of Company ABC. He believes the defensive interval would provide allow him to understand if the company's liquidity position is improving or declining over time. The analytical team pulled the annual reports for Company ABC, and the table below contains the information over the last three years:

Year 1Year 2Year 3
Current Assets (Cash, Marketable Securities, A/R)$26,935,200$21,351,724$22,180,299
Less Uncollectibles Associated with A/R)$449,000$356,000$370,000
Net Liquid Assets$26,486,200$20,995,724$21,810,299
Daily Operating Expenses$854,000$724,000$779,000
Defensive Interval (Days)312928

The decline in the number of days over the last three years indicates the erosion of the metric, meaning the company's operating expenses are growing faster than its liquid assets. Based on this information, the fund manager asked his team to calculate some additional liquidity metrics for Company ABC.

Related Terms

long-term assets to long-term debt ratio, risky asset conversion ratio, short-debt debt to long-term debt ratio, working capital to debt ratio

Explore Investing Further

Related Content

  • Biden Or Trump: Who Is Better For The Economy And Stocks?
    Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
    March 19th, 2024
  • When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
    March 14th, 2024
  • DRIP Brokers: Best Brokers for Dividend Investing for November 2024
    Reinvesting dividends could mean compound growth for your portfolio. But reinvesting them manually can be a hassle. This is why you could benefit from a dividend reinvestment plan (DRIP).
    March 12th, 2024
  • How To Invest in Real Estate Without Becoming a Landlord
    We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
    March 6th, 2024
  • Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
    ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
    February 29th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.