Tobin’s Q Ratio

Tobin’s Q Ratio was come up by James Tobin,the Nobel economy prize Adwarder in 1969.

What Does Q Ratio (Tobin’s Q Ratio) Mean?

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.

Tobin’s Q Ratio

Tobin’s q[1] was developed by James Tobin (Tobin 1969) as the ratio between the market value and replacement value of the same physical asset:

One, the numerator, is the market valuation: the going price in the market for exchanging existing assets. The other, the denominator, is the replacement or reproduction cost: the price in the market for the newly produced commodities. We believe that this ratio has considerable macroeconomic significance and usefulness, as the nexus between financial markets and markets for goods and services