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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Watch Tim Bennett's video tutorial: What is Tobin's Q ratio?
-
Smaller companies: starting to turn?
The long-awaited turnaround in smaller companies is unlikely to happen just because shares are lowly-valued. However, an improving economic and interest rate backdrop could spark renewed interest in the sector. M&A activity is also providing support for the smaller companies sector
By MoneyWeek Published
-
What are safe-haven assets and should you invest in them?
Investors turn to safe-haven assets like gold and government bonds in periods of market turmoil. How do they work and should you invest in them?
By Katie Williams Published