Q Ratio

Written By
Paul Tracy
Updated November 4, 2020

What is a Q Ratio?

The Q ratio is a measure of how overpriced or underpriced the whole stock market is. It is based on Tobin's Q, which measures a firm's assets in relation to its market value. The formula for Tobin's Q is:

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

Likewise, the formula for the Q ratio is:

Q Ratio = Total market value of all companies in stock market/Total asset value of all companies in the stock market

How Does a Q Ratio Work?

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. The data for the Q ratio typically exists in the Federal Reserve's quarterly Flow of Funds Accounts reports.

Why Does a Q Ratio Matter?

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.

When applied to the entire market, as the Q ratio is, anything above the mean Q ratio indicates that the market is generally overvalued (and that it might be time to invest in something besides stocks); anything below the mean Q ratio indicates that the market is generally undervalued (and now might be the time to shift away from other asset classes).

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Q Ratio.
Be the first to ask a question

If you have a question about Q Ratio, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Q Ratio, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Q Ratio

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms