Q ratio

The Q ratio, or Tobin’s Q, can be a reliable measure of stockmarket value. Introduced as a concept by Nobel Laureate Professor James Tobin in 1969, it compares the total market value of the companies whose shares make up an index with their net worth as measured by their replacement cost (what it would cost to recreate their businesses).

Historically, the Q ratio has always reverted to a long-term average of about 0.64 – usually via increases or decreases in stock prices, as these move far more rapidly than net worth. So comparing the current value with this figure allows investors to gauge the current degree of over- or under-valuation of a market.

Q can be calculated for many markets such as the S&P 500 or the FTSE, but data constraints render it much less useful for other markets or individual shares. Critics of the Q ratio claim that its emphasis on tangible assets – such as plants and inventory – unfairly neglects important intangibles, including brands and intellectual property.

• Watch Tim Bennett’s video tutorial: What is Tobin’s Q ratio?

 

MoneyWeek magazine

Latest issue:

Magazine cover
The future of motoring

Profit as cars get connected

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

FREE REPORT:
What you should really do with your money (2014 Edition)


How to buy and sell penny shares

A beginner's guide to investing in gold

How to invest in British fracking