The Akron Legal News

Current vs. quick ratios

The Motley Fool
Published: July 11, 2019

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.

Q: 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.)

Fool's School

Make Your Teens Financially Savvy

Give your kids love and attention, but help them grow into smart money managers, too. That can set them up to be financially independent and secure in adulthood. Here are some tips:

-- Set a good example. Let them see you paying bills on time, using coupons and seeking discounts, setting financial goals and working to reach your goals. Share your successes and lessons learned -- such as the danger of credit card debt and the value of living below your means.

-- Teach them how to budget their money. If they get allowances or earn money, help them prioritize their spending and decide how to use their cash. Have your teens contribute toward major expenses such as their car insurance.

-- Show your teens how to comparison shop and save money. Introduce them to savings apps such as Shopular, Yroo, ShopSavvy, Krazy Coupon Lady (KCL), RetailMeNot, BuyVia, and Flipp. Discuss ads and commercials they see, pointing out how marketers are trying to persuade them to buy.

-- Consider part-time jobs for teens. A job will offer some spending money and can also teach them about the value of time and hard work. Something they might want to buy if their parents were paying for it may seem less necessary when they have to work many hours to earn it.

-- Open Roth IRAs for your teens once they have earned income (contributions can come only from earned income). Learn much more about IRAs at Fool.com/retirement.

-- Avoid getting credit cards for teens -- at least until they've demonstrated a high level of responsibility. Paying with plastic can seem less real than paying with hard-earned cash, encouraging some to live beyond their means and rack up debt.

Your teens can learn much more in "The Motley Fool Investment Guide for Teens" by David and Tom Gardner with Selena Maranjian (Touchstone, $16), and in "I Want More Pizza" by Steve Burkholder (Overcome Publishing, $9).

My Dumbest Investment

Fannie Mae Not

My dumbest investment was in shares of Fannie Mae. Need I say more? I lost much of my investment in a single day! Ouch. Never again. -- C.G., online

The Fool responds: The Fannie Mae story has been complicated -- and costly to many investors.

Fannie Mae, more officially known as the Federal National Mortgage Association, is a government-sponsored enterprise (GSE) that, in its own words, is a "leading source of financing for mortgage lenders, providing access to affordable mortgage financing" to millions of homebuyers.

The GSE racked up losses in the 2000s from sub-prime mortgages, and in 2008, along with Freddie Mac (the Federal Home Loan Mortgage Corporation), it was bailed out by the federal government and placed under federal supervision. Its dividend was suspended and has yet to be reinstated. Its investors saw the stock fall from roughly $70 per share in 2007 to $7 on the day before the bailout, before plunging 90% the next day, to $0.73 per share, following news of the bailout. More recently, shares have been trading near $2.80, and Fannie Mae is still under government conservatorship.

A lesson here for investors is to dig deeply into a company's situation and prospects if its shares start falling significantly. Better still, keep up with the company all along, to reduce chances of being unpleasantly surprised by bad news. Diversification helps, too: Don't keep too many eggs in any one basket.

Foolish Trivia

Name That Company

I trace my roots back to 1963, when a single mother used $5,000 to launch a cosmetics company in Dallas. It was immediately successful and generated nearly $1 million in sales in its second year. My original store employed fewer than 10 people, but I now have 3.5 million people, mostly of a particular gender, selling my wares in more than 35 global markets. I have more than 1,500 patents. I rake in about $4 billion annually and like to reward my top sellers with a distinctive set of wheels. Who am I?

The Motley Fool Take

A Shopify Spree

Amazon.com isn't the only company demonstrating phenomenal growth in the $3.5 trillion retail e-commerce market. For example, there's Shopify (NYSE: SHOP), which provides a platform to help businesses both large and small build out their online presence and increase their sales.

In its most recent quarter, Shopify's sales shot up 50% compared to the year-ago quarter, and the total number of merchants on the platform now sits around 820,000. Shopify's merchant solutions (which include payment transactions, fees and hardware sales) increased sales by 58%, and sales from subscription solutions jumped 40% year-over-year.

Meanwhile, Shopify is expanding its revenue streams by boosting its Shopify Plus service, which helps major brands and large companies with enterprise e-commerce services. Shopify Plus now accounts for 26% of the company's monthly recurring revenue, up from 22% in the first quarter of 2018. The company is also venturing into fulfillment, launching a network of fulfillment centers.

Shopify's share price has skyrocketed more than 100% over the past year, and with the company's potential to tap the e-commerce market further, it still has plenty of room to grow. Risk-tolerant, long-term investors who are looking for a compelling e-commerce play able to scale along with businesses as they grow their online sales should consider snapping up some shares of Shopify. (The Motley Fool owns shares of and has recommended Shopify.)

(EDITORS: For editorial questions, please contact Elizabeth Kelly at ekelly@amuniversal.com.)

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