Q Ratio (Tobin's Q Ratio)

AAA

DEFINITION of 'Q Ratio (Tobin's Q Ratio)'

A ratio devised by James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets:

Q Ratio (Tobin's Q ratio)

INVESTOPEDIA EXPLAINS 'Q Ratio (Tobin's Q Ratio)'

For example, a low Q (between 0 and 1) means that the cost to replace a firm's assets is greater than the value of its stock. This implies that the stock is undervalued. Conversely, a high Q (greater than 1) implies that a firm's stock is more expensive than the replacement cost of its assets, which implies that the stock is overvalued. This measure of stock valuation is the driving factor behind investment decisions in Tobin's model.

RELATED TERMS
  1. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  2. McKinsey 7S Model

    A model of organizational effectiveness that postulates that ...
  3. Replacement Cost

    The cost to replace the assets of a company or a property of ...
  4. Asset

    1. A resource with economic value that an individual, corporation ...
  5. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
  6. Undervalued

    A financial security or other type of investment that is selling ...
Related Articles
  1. Economics Basics
    Economics

    Economics Basics

  2. What's the difference between book and ...
    Investing

    What's the difference between book and ...

  3. What is a company's worth, and who determines ...
    Investing

    What is a company's worth, and who determines ...

  4. A Sanity-Saving Retirement Stock Portfolio
    Retirement

    A Sanity-Saving Retirement Stock Portfolio

comments powered by Disqus
Hot Definitions
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  2. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  3. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  4. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  5. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  6. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
Trading Center