Current and quick

Q:

What’s a company’s “current ratio”? — H.L., Detroit

A:

It’s the company’s current assets divided by its current liabilities. This ratio reflects whether it has enough short-term assets (such as cash and expected incoming payments) to cover its short-term obligations (such as payments due).

A more meaningful metric is the “quick ratio,” as that calculation subtracts assets that aren’t as liquid — such as inventories, supplies and prepaid expenses — before dividing by current liabilities. (These figures are all found on a company’s balance sheet.)

It’s good to check out a company’s current debt condition, but understand that it’s only one part of the whole picture — it ignores, for example, long-term debt.

When considering any company for your portfolio, assess other factors, such as revenue and earnings growth rates, profit margins, inventory levels, competitive advantages and valuation metrics. You can learn more about evaluating and investing in stocks at the “Investing Basics” nook at Fool.com, and also at Morningstar.com.

Q:

I’ve made some profits in penny stocks as a beginning investor. Can you recommend any good low-priced stocks? — K.W., Hoover, Ala.

A:

Yikes — you’ve really lucked out if you haven’t lost money in penny stocks. Often tied to small and unprofitable companies, penny stocks can be extremely risky, and many people have lost their shirts in them.

Don’t assume that if you don’t have a lot of money to invest, you have to stick with low-priced stocks. Yes, you can buy 600 shares of a $1 stock for just $600. But it stands a good chance of becoming a $0.50 stock or a $0.01 stock. Instead, you could just buy 20 shares of a healthy and growing company’s $30 stock or three shares of a $200 stock.