Defensive Interval Ratio (DIR)
Defensive interval ratio (DIR) also known as Defensive interval period (DIP) or basic defensive interval (BDI). It is the useful liquidity ratio which tells that the more liquid assets of the company without the external financial resources can manage its daily operating expenses for what numbers of days.
Definition: What is defensive interval ratio?
For the measurement of the liquidity risk of the company defensive interval ratio (DIR) is used. In this ratio, defensive asset values use which means that it measures the liquidity of the company in a realistic way.
If the company can survive on its liquid assets it means that the company is very strong and did need of the external sport for operating the company.
So if the DIR is good then the company is good.
To find the liquidity situation of the company management uses this ratio during a different period. Many businesses are cyclical like tourism in which student book holiday at the start of the year and take a trip in the holidays season.
So the company receives a lot of cash in the booking period. During the booking, season revenue is low because of which company manage its operation through internal resources.
But the trend is changing in the season of holidays and revenue of the company started. So for this company, it is necessary that measure the liquidity of the company through the period and compares it with the previous year.
How to calculate defensive interval ratio (DIR) from the formula.
Defensive interval ratio can be calculated by dividing the defensive assets by daily operational expenses.
Defensive interval ratio = Defensive assets/ Daily operational expenses
As compared to the current ratio or quick ratio analyst considre DIR ratio more suitable because it compares the assets to expenses whereas current ratio compares the assets to liabilities.
Generally, high DIR company is considered to be a good company but in some cases higher DIRis not good. Because due to high DIR liquidity of the company is much high and some time company is not employing efficiency for generating high return. Usually, analyst chooses this ratio for measuring from industry in which this company operates.
Some companies deploy their capital for long term value creation in large scale. Some company gets the loan to operate their operations.
So before calculating the DIR analyst need to analyze these factor before.
At the regular intervals, lender measure this ratio of the company. This ratio provides the proxy of the operating condition of the company which is near to the real operating condition.
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