The Fed, Explained

Q What is the Federal Reserve? — H.Y., Tulsa, Okla.

A The Fed" is the central bank of the United States, founded by Congress in 1913. In its own words, its duty is "conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices; promoting the stability of the financial system; providing banking services to depository institutions and to the federal government; and ensuring that consumers receive adequate information and fair treatment in their interactions with the banking system.

In the recent credit crisis, the Fed has intervened, cutting interest rates and keeping money flowing by offering lines of credit to lenders. Learn more at www.federalreserve.gov.

Q To determine a company's value, should I check the relationship of current assets to current liabilities?

— E.B., Fort Wayne, Ind.

A Dividing a company's current assets by its current liabilities gives you its "current ratio," which tells you if it has sufficient short-term assets (such as cash and expected payments) to cover its short-term obligations (such as payments and interest due). The "quick ratio," which subtracts inventories from current assets before dividing by current liabilities, is a bit more meaningful.

A company's debt situation is good to know, but it's just a tiny piece of its profile, telling you nothing about its profitability, long-term debt, growth rate, competitive position or valuation. Ideally, you should examine a company from many different angles, crunching a lot of numbers, such as profit margins, inventory levels, growth rates and more. Checking out a firm's management is smart, too.

Learn more about how to evaluate companies and invest in stocks at www. fool.com/investing/basics/index.aspx, www.morningstar.com/cover/classroom. html and www.betterinvesting.org.

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