Q: What are “quick” and “current” ratios? — B. W., Saratoga Springs, New York
A: They’re measures of a company’s debt level, calculated from its balance sheet. For the current ratio, divide current assets by current liabilities, revealing whether the company has sufficient resources (such as cash and expected payments) to pay its bills over the coming year. The quick ratio, sometimes called the acid-test ratio, is a bit more meaningful, subtracting inventories from current assets before dividing by current liabilities.
A result above 1 is good for both ratios, and above 1.5 is better, though a very high number can reflect assets sitting around unproductively.
These numbers vary by industry, so compare a company only with its peers — or with itself over time — to see trends. Declining ratios, for example, can be a red flag.
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Q: What do chief financial officers do?
— T. Y., Greenwood, South Carolina
A: A company’s chief financial officer (CFO), such as The Home Depot’s Carol Tomé, Southwest Airlines’ Tammy Romo and MasterCard’s Martina Hund-Mejean, is responsible for all things financial, such as determining what the company’s financial needs are and will be, deciding how best to finance those needs, and informing all stakeholders (investors, creditors, analysts, employees, management) of the company’s financial condition.
The CFO also maintains the best mix of internal cash, debt financing and stock financing for the company (this is known as its “capital structure”). The CFO plans and oversees the forecasting and budgeting process, monitors all cash flow, maintains relationships with funding sources such as commercial and investment banks, and oversees the process of developing and communicating the quarterly and annual financial statements.
Finally, the CFO has ultimate accountability for maintaining the books and records of the company.
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