Q ratio

The Q ratio, or Tobin's Q, can be a reliable measure of stockmarket value.

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?

Most Popular

Fan heater vs oil heater – which is cheaper?
Personal finance

Fan heater vs oil heater – which is cheaper?

Sales of portable heaters have soared, as households look to cut their energy costs. But which is better: a fan heater or an oil heater? We put them t…
21 Nov 2022
Best regular savings accounts – December 2022
Savings

Best regular savings accounts – December 2022

You can earn an attractive rate on the best regular savings accounts. We tell you the best on the market to take advantage of right now
1 Dec 2022
2 investment trusts with growing dividends: which one should you invest in?
Investment trusts

2 investment trusts with growing dividends: which one should you invest in?

They might not have spectacular yields but these two trusts have increased their dividend every year for 55 years.
24 Nov 2022