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 1 | Year 2 | Year 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) | 31 | 29 | 28 |
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.
