Chartered Financial Analyst (CFA) Level 1 Practice Exam

What does the defensive interval ratio indicate?

1. Long-term financial stability

2. Ability to cover daily cash expenditures

3. Return on assets

4. Debt repayment capacity

The correct answer is: Ability to cover daily cash expenditures

The defensive interval ratio is a financial metric that measures a company's ability to cover its cash expenditures over a specified period, typically focusing on its liquidity position. This ratio is particularly important for assessing how well a company can sustain its operations without relying on external financing or generating income, especially during periods of financial stress. By using the defensive interval ratio, analysts determine how many days a business can operate using its liquid assets and available cash in comparison to its daily cash outflows. This provides insights into the company's short-term financial health and can indicate how well it can manage its immediate liabilities and operational costs. Understanding this ratio is crucial for investors and analysts assessing a company's risk profile, particularly in volatile markets or during economic downturns, where liquidity can become a significant concern. It reflects a company's preparedness to handle its cash needs without immediate sales or income, thereby highlighting its operational resilience.