Current vs. quick ratios

Q What are “current” and “quick” ratios? — O.P., Bloomington, Indiana A Both are measures of a company’s short-term liquidity. To calculate a company’s current ratio, go to its balance sheet and divide current assets by current liabilities. The result shows whether the company has sufficient resources — such as cash and receivables — to pay its bills over the coming year.

The quick ratio (sometimes called the acid-test ratio) is similar, but it’s a bit more meaningful, as it subtracts inventory and prepayments from current assets before dividing by current liabilities.

Quick ratios and current ratios of 1.0 are good. Consider a high ratio a red flag, as it can reflect assets sitting around unproductively. These ratios vary by industry, so compare a company only with its peers — or with itself over time — to spot trends.

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Can you explain “dollar-cost averaging”? — L.L., Hendersonville, North Carolina A Yup. Dollar-cost averaging is when you regularly spend a set sum on an investment over time. For example, you might invest $1,000 in Big Bangs Salon (ticker: BZNGA) stock every three months, for a year or longer. You’d do this regardless of the stock price — for example, buying 10 shares when the price is $100 and 12 shares when it’s $83.

With this system, you’ll be buying more shares when the stock price is lower, and fewer shares when it’s higher. It’s a good way to accumulate shares if your budget is limited, or if you’re not confident enough to invest a big chunk of money all at once, lest the market suddenly tumble. (Keep your commission costs in check, though — you don’t want to be spending, say, $7 to invest just $100.)