Q Ratio (Tobin's Q Ratio)

Loading the player...

What is the 'Q Ratio (Tobin's Q Ratio)'

The Tobin's Q ratio is 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)

BREAKING DOWN '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. Tobin Tax

    A means of taxing spot currency conversions that was originally ...
  2. James Tobin

    An American economist who won the Nobel Memorial Prize in Economics ...
  3. Regulation Q

    A Federal Reserve Board regulation that prohibited banks from ...
  4. Replacement Cost

    The cost to replace the assets of a company or a property of ...
  5. Mutual Fund Theorem

    An investing theory, postulated by Nobel laureate James Tobin, ...
  6. Cash Return On Assets Ratio

    A ratio used to compare a businesses performance among other ...
Related Articles
  1. Professionals

    How To Make Money Using Tobin's Q Ratio

    Although it seems simple, Tobin's Q Ratio is more complex than it appears. We explore some of its main strengths and weaknesses.
  2. Fundamental Analysis

    Calculating the Q Ratio

    The Q ratio measures the market value of a company compared to the replacement value of the firm’s assets.
  3. Forex Education

    No.5. The Public Buys At The Most At Top And The Least At The Bottom

    Once the media reports a move, it is already complete.
  4. Markets

    Sharpe Ratio

    Learn about this ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance.
  5. Investing Basics

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  6. Economics

    Explaining Replacement Cost

    The replacement cost is the cost you’d have to pay to replace an asset with a similar asset at the present time and value.
  7. Saving and Spending

    How to Invest Your Excess Cash in Undervalued Securities

    Learn how even small investors can shoot for substantial capital gains by starting to invest their excess cash in undervalued securities.
  8. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  9. Active Trading

    5 Must-Have Metrics For Value Investors

    These quick-and-dirty ratios will help you find the most undervalued stocks on the market.
  10. Forex Education

    How To Use The P/E Ratio And PEG To Tell A Stock's Future

    While the price-to-earnings ratio is commonly used for assessing stock prices, the price/earnings-to-growth ratio offers forecasting advantages that investors need to know.
RELATED FAQS
  1. How do I use ratios to perform a financial analysis?

    Learn which ratios are used in fundamental analysis. Find out how analysts measure company performance and financial health ... Read Answer >>
  2. What is considered a good PEG (price to earnings growth) ratio?

    Learn about the price/earnings to growth (PEG) ratio and understand what investors and market analysts consider a good ratio ... Read Answer >>
  3. How exactly do I use the price to sales ratio to evaluate a stock?

    Learn the best way for investors and market analysts to make use of the price to sales ratio in evaluating a company's stock. Read Answer >>
  4. What role does ratio analysis play in valuing a company?

    Learn about the role of ratio analysis in determining company value, including some of the most common ratios used by modern ... Read Answer >>
  5. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  6. Why do shareholders need financial statements?

    Discover the importance of a company's financial statements for stock shareholders in evaluating their equity investment ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center