How to calculate Q Ratio

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The Q ratio measures the market value of a company compared to the replacement value of the firm’s assets. • Nobel laureate James Tobin came up with the Q ratio. He based it on his theory that the combined market value of every company on a stock market should roughly equal their replacement costs. In other words, the value of a United States firm should be equal to what it would cost to start that same firm today. • A Q ratio is calculated by dividing the total market value of firms by their total asset value. • For example, say the firms on a stock market have a total value of $100 billion, and the cost to replace them is $100 billion. The Q ratio is 1. • A Q ratio above 1 means the market is overvalued and stocks might not be the best investment. A Q ratio below 1 means the market is undervalued. • When applied to an individual company, a Q ratio above 1 means it’s overvalued. Its stock is more expensive than the costs of its assets. When the total market value is below the cost of its assets, a firm’s Q ratio is less than 1. That means its stock is undervalued. • Historically, Q ratios have provided investors with valuable information to guide their decisions. • Read more: http://www.investopedia.com/video/pla... • Copyright © Investopedia.com

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