Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

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.

Related Terms View All
  • Qualifying Widow or Widower
    Let's say John and Jane Doe have been married for 40 years. John is diagnosed with...
  • Market versus Quote (MVQ)
    MVQ is the difference between the last market price at which a security was bought or...
  • Macroprudential Analysis
    In the United States, stress tests are the most common example of macroprudential...
  • High Flier
    Let's say Company XYZ rises 45% in five days -- well ahead of the market's rise of 10%...
  • Narrow Basis
    For example, let's say the price of a bushel of wheat is $1 right now (this is called the...