The liquidity ratios of a firm outlined in the preceding discussions throw light on the ability of a firm to pay its current liabilities. Apart from paying current liabilities, the liquidity position of a firm should also be examined in relation to its ability to meet projected daily expenditure from operations. The difference-interval ratio provides such a measure of liquidity. It is a ratio between the quick/liquid assets and the projected daily cash requirements and is calculated according to Eq. 7.6.
The projected cash operating expenditure is based on past expenditures and future plans. It is equivalent to the cost of goods sold excluding depreciation, plus selling and administrative expenditure and other ordinary cash expenses. Alternatively, a very rough estimate of cash operating expenses can be obtained by subtracting the non-cash expenses like depreciation and amortization from total expenses. Liquid assets, as already stated, include current assets excluding inventory and prepaid expenses.
The defensive-interval ratio measures the times-pan a firm can operate on resent liquid assets (comprising cash, marketable securities and debtors) without resorting to next year’s income.