What is Tobin's Q Ratio?
The Tobin's market value. The formula for Tobin's Q is:is a measure of firm assets in relation to a firm's
Tobin's Q = Total Market Value of Firm / Total Asset Value of Firm
How Does Tobin's Q Ratio Work?
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 Does Tobin's 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.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
We've managed to avoid the great Mayan prediction of the end of the world in 2012, along with countless doomsday prognostications before it. But while we shrug off the continued calls that some...Read More →
Less than a quarter of Americans older than 55 has at least $250,000 in savings and...Read More →
Scoring profits in the stock market isn't just about finding winning...Read More →