Calculate and Interpret Tobin’s Q Ratio

By Stock Research Pro • October 5th, 2009

Tobin’s Q ratio or the “Q ratio” works on the theory that the total market value of companies on the stock market should equal replacement costs of those company’s assets. For some investors, Tobin’s Q ratio offers a fundamental standard of value to assess the current level of the stock market. Devised by James Tobin, Yale University Nobel laureate in economics, the ratio is calculated by dividing company market value by the replacement value of the firm’s assets.

Calculate Tobin’s Q Ratio

The formula for Tobin’s Q ratio can be written as:

Q Ratio = Total Market Value of the Firm / Total Asset Value

When applied to any specific company, a low Q ratio (less than 1.0) would indicate that the cost to replace the assets of the firm is greater than the value of its stock, implying that the stock is currently undervalued. A value greater than 1.0, on the other hand, would indicate that the stock is currently overvalued as it is more expensive than the replacement costs of the firm’s assets.

Tobin’s Q Ratio and Value Investing

Tobin’s Q ratio is not typically used as a short-term trading tool. Instead, value-oriented investors can use it as one approach to valuation with an eye toward a longer-term “buy and hold” approach. While investors should never rely on any single data point when determining stock values, Tobin’s Q ratio does offer some insight on market and stock valuation.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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