W found himself standing in the hallway in front of his apartment.

His mind crescendoed with thoughts -- had he imagined the whole thing? Why had they let him go? If he was on trial, what was he on trial for? Who was trying him? What crime had he committed? The last question made him admit to himself that possibly he had stolen some trinket way back when he was a child, but that was in the distant past. He didn't gamble, he wasn't an out-on-the-town kind of guy, he didn't drink, and he was pretty honest in his job of freelance writing. He had never even written anything slanderous. But the real thing that got W was that he knew nothing whatsoever about working capital. And what was that current ratio thing?

W walked across the room. A newspaper lay on a table next to a bowl of milky sludge that was yellow with dissolved cereal. Ants crawled across the table, but W was uninterested. He stared at the newspaper, the very same one that he'd been reading when he'd been arrested. The headline of the business section popped out from the folded sheets of newsprint.

The Rodeo Semiconductor Company Fails!

Unable to Pay Debtors

W suddenly began to grasp at some indescribable connection. "Those men who arrested me talked about working capital...and that measured liquidity," he thought. "And then the Inquisitor talked about current ratio, which also had to do with liquidity. All of that is the ability to pay debts! I wonder if the semiconductor had good working capital...or a decent quick ratio."

W raced out of the house in a skip and hopped across town to the Public Library. He pored through books and sheets and even more reports. At last he found Rodeo Semiconductor's balance sheet. Armed only with a pencil and paper he figured out what Rodeo's working capital had been before it failed. Everything seemed to check out fine there, so he went on and worked out the current ratio. At 1.5, Rodeo seemed to be okay there, too. Not about to give up, W made a copy of the financial statements and left the library.

A bright cab pulled up even before he signalled. He got into the back seat and distractedly gave the driver the address of his apartment building. The driver turned to look back at him and smiled mysteriously. W grew suspicious when he saw ringing bells on the driver's turban. "Hey, don't I know you?!" W demanded.

"Yes. I believe we met recently, Mister W," the driver replied.

"You're that Fool character aren't you? And how do you know my name?"

Obtusely the Fool replied, "I know some things and that is one of them."

"You helped me out yesterday...er, whenever that was...do you think you could again? I looked at the financial statements of that semiconductor company that went bankrupt, and the working capital and current ratio looked fine. I don't understand."

"Oooh, yes, yes, I saw that. We are now at your building, Mister W. Let me give you a present that will answer your question for you." The Fool fumbled around with some papers. "Here it is...yes, you will like it, no doubt."

Stepping out of the car, W asked, "Why are you giving me the Aleeweed Guide to Stock-Picking Inner Harmony?"

The Fool replied, "Well, look that over if you like, but behind it, there is a little sheet about liquidity. Take a look at the quick ratio on it -- it will help you."

***What is the Quick Ratio?***

1) The same as the current ratio
2) Current assets divided by total liablities
3) The sum of cash, marketable securities, and receivables divided by current liabilities
4) Tangible current assets divided by current liabilities

Liquidity information provided by Joe Louderback.

The answer is 3) The sum of cash, marketable securities, and receivables divided by current liabilities.

Standing on the sidewalk, W stopped for a moment and looked down at the liquidity sheet the Fool had given him. He skimmed past working capital and current ratio to read: "The Quick Ratio, also called the Acid-Test Ratio, seeks to determine the extent to which a company can cover its current liabilities with its most liquid assets, which are sometimes called quick assets. Current assets typically consist of the three enumerated items plus inventories and prepayments. Inventories are less liquid than the three quick assets, and prepayments will never be converted into cash, but instead reduce later cash payments for such items as rent and insurance. Many analysts state the numerator of the ratio as current assets less inventories, because prepayments are often negligible. A quick ratio greater than 1 to 1 is a common criterion of good liquidity, but as with the Current Ratio, the industry the company is in, and other factors affecting the stability of its cash flows, are important."

W pulled the copy of Rodeo Semiconductor's financial statements out of his pocket. He didn't work the math out exactly, but a rough mental calculation was enough to tell that Rodeo's quick ratio had been bad news.

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