Q Ratio (Tobin's Q Ratio)
 |
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: |
 |
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 Definitions
Articles Of Interest
-
Using The Price-To-Book Ratio To Evaluate Companies
The P/B ratio can be an easy way to determine a company's value, but it isn't magic! -
A Sanity-Saving Retirement Stock Portfolio
The market rollercoaster has many retirees calling it quits on stocks. Big mistake. -
What's the difference between book and market value?
Book value is the price paid for a particular asset. This price never changes so long as you own the asset. On the other hand, market value is the current price at which you can sell an asset. ... -
What is a company's worth, and who determines its stock price?
A company's worth - its total value - is its market capitalization, and it is represented by the company's stock price. Market cap (as it is commonly referred to) is equal to the stock price ... -
Economics Basics
Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more! -
Leading Economic Indicators Predict Market Trends
Leading indicators help investors to predict and react to where the market is headed. -
Hetty Green: The Witch Of Wall Street
Hetty Green was the richest woman of her time and possibly the first value investor, yet she's not remembered kindly. -
Muriel Siebert: Female Finance Pioneer
Muriel Siebert has blazed many paths for investors, but is especially relevant as the first woman to sit on the NYSE. -
5 ETFs Flaws You Shouldn't Overlook
Despite their popularity, exchange traded funds have some drawbacks that investors should know about. -
Great Company Or Growing Industry?
Look at the big picture when choosing a company - what you see may really be a stage in its industry's growth.
Free Annual Reports
