Current and quick

Q. What are “current” and “quick” ratios? — H.L., Lexington, Kentucky

A.

They’re measures of liquidity, reflecting how easily a company may be able to meet its short-term obligations.

The current ratio is the simplest: Just divide current assets by current liabilities (both figures can be found on the latest balance sheet). The quick ratio is actually less quick to calculate, as it subtracts less-liquid assets (such as inventory and prepaid expenses) from current assets before dividing by current liabilities. There’s a third liquidity ratio, too — the “cash ratio.” It takes only the most liquid assets — cash and marketable securities — and divides them by current liabilities.

In general, each ratio should be 1 or more; ratios below that suggest the company may not be able to cover its immediate debts. However, an unusually high number may indicate a company not using its assets effectively. Current ratios will typically be higher than quick ratios, which will be higher than cash ratios. These figures can vary by industry, too, so it’s best to compare a company’s liquidity ratios with its peers — or with itself over time, to spot trends.

Q. How can a company’s earnings grow more slowly than its revenue? — M.M., Savannah, Georgia

A.

They don’t necessarily grow at the same rate. For example, if a company’s revenue (also known as “sales,” and appearing at the top of its income statement) grows by 5% from one year to the next, but its costs increase by 30% (perhaps due to a tight supply of its raw materials), earnings growth will lag sales. But earnings that grow more quickly than revenue suggest increased efficiency and a growing profit margin.

Different accounts, different investments

When investing money in various kinds of accounts, be mindful of what you park where — because different assets get different tax treatments in various accounts.

For starters, consider buying investments that you have especially high hopes for, such as growth stocks, using a Roth IRA. That way, if your account does swell significantly, all that money may be withdrawn tax-free in retirement.

It’s usually best to buy into great stocks with the intention of hanging on for a long time. But if you happen to be an active stock trader, consider doing much of your buying and selling in a tax-deferred or tax-free retirement account, such as an IRA. This avoids the short-term capital gains tax rate, which is the same as your ordinary income tax rate — possibly 22%, 24%, 32% or more. Long-term capital gains, on assets you’ve held for more than a year, are taxed at a much more favorable rate, which for most of us is 15%.

Tax-deferred or tax-free accounts such as IRAs and 401(k)s are also good spots to park taxable bonds and bond funds, to delay or avoid paying taxes on that income. Otherwise, their interest payments to you will be taxed at your ordinary income tax rate. (Delayed taxes can be lower taxes, too, as many people drop into lower tax brackets when they retire.) These accounts are also good for actively managed mutual funds that generate a lot of short-term capital gains, and for real estate investment trusts, or REITs.

Meanwhile, municipal bonds and municipal bond funds are fine to keep in regular, taxable accounts, because the interest they generate is typically tax-free. Such accounts can also be good places for index funds and for stocks you plan to hold for more than a year, as (at the moment) they’ll eventually face that relatively low long-term capital gains rate.

Taxes can take a significant bite out of your gains, so it’s worth aiming to minimize them.