Tobin's Q Ratio

What it is:

The Tobin's Q ratio is a measure of firm assets in relation to a firm's market value. The formula for Tobin's Q is:

Tobin's Q = Total Market Value of Firm / Total Asset Value of Firm

How it works/Example:

For example, let's say Company XYZ has $40 million of assets, 10 million shares outstanding and a current share price of $3. Using the formula, we can calculate that Tobin's Q is:

Tobin's Q = (10,000,000 x $3) / $40,000,000 = 0.75

James Tobin, a Nobel Prize winner in economics and a professor at Yale University, developed the ratio after hypothesizing that companies should be "worth" what they cost to replace.

Why it Matters:

When the Tobin's Q ratio is between 0 and 1, it costs more to replace a firm's assets than the firm is worth. A Tobin's Q above 1 means that the firm is worth more than the cost of its assets. Because Tobin's premise is that firms should be worth what their assets are worth, anything above 1.0 theoretically indicates that a company is overvalued.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.