We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is a Q Ratio?

Jim B.
By
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Q ratio is a method of measuring publicly traded companies in an effort to predict their stock market potential. Also known as Tobin's Q in honor of the economist who created the formula, Q ratio is reached by dividing a company's market value by the replacement value of all of the company's assets. A ratio higher than one suggests that a company is overvalued, while a ratio of lower than one is considered low and indicates that a company may be undervalued. This ratio is also often used to measure the market as a whole and signal to investors whether prices in general will be rising or falling.

James Tobin of Yale University, who was a Nobel laureate in the field of economics, developed the theory upon which the Q ratio is based. The concept of the replacement value of a company's assets is the key element to his theory. Essentially, the replacement value of the assets of a specific company is what it would cost to rebuild the company from scratch to the exact standing it has at the current time.

Taking this replacement value and dividing it into the company's total market value yields a company's Q ratio. Tobin theorized that the ratio for all of the stock market should be one because the market value should be determined by the assets of the companies within it. That isn't the case, however, which means that certain stocks are being regarded as higher than they should be, while others may not be getting the market attention they deserve.

If a company has a Q ratio greater than one, it means that its actual assets fall short of how highly investors regard the company itself. On the contrary, an undervalued company will have a ratio of less than one, meaning that the value of its assets outweighs the current stock price. These inefficiencies are caused by investors' reliance on intangible qualities, such as brand names, past experience, and customer loyalty, when making their decisions.

Investors also use the Q ratio to study the stock market as a whole. As the ratio was designed with the entire market in mind, it has proven in the past to be an accurate predictor of how the market will be trending shortly after it is calculated. The ratio for the entire market moves at an extremely slow pace, so investors who believe in its predictive powers take note any time that it shifts decisively one way or another.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jim B.
By Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own successful blog. His passion led to a popular book series, which has gained the attention of fans worldwide. With a background in journalism, Beviglia brings his love for storytelling to his writing career where he engages readers with his unique insights.
Discussion Comments
Jim B.
Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.