Also known as: dir. · director
Written by attorneys · grounded in primary & secondary sources — see below
A liquidity ratio that measures the time span during which a company can operate using its present liquid assets without resorting to revenues from future periods. The ratio is computed by dividing defensive assets consisting of cash, marketable securities, and net receivables by projected daily expenditures from operations.
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Dakota Industries faces a sudden drop in sales. Its managers calculate defensive assets of cash and receivables against daily cash needs to determine how many days the firm can continue paying suppliers and employees without new revenue inflows.
Duarte Shipping reviews its balance sheet and finds inventory tied up in slow-moving stock. Managers divide defensive assets by average daily operating costs to see whether the firm can sustain operations longer than the quick ratio alone would indicate.
The ratio divides defensive assets of cash, marketable securities, and net receivables by projected daily expenditures obtained by dividing cost of goods sold plus ordinary cash expenses by 365.
It focuses on the number of days operations can continue using liquid assets alone, revealing how long a firm can survive without new revenues even when inventory is excluded from the quick ratio.