the market value of all securities (not just equity) divided by the replacement cost (not book value) of all assets. The Q ratio reflects the market's valuation of new investment. A ratio greater than one means that a firm is earning returns greater than the amount invested. For this reason, a company with a ratio exceeding one should attract new resources and competition; also called Tobin's Q. The higher the Q ratio, the greater the industry attractiveness and/or competitive advantage. The notion of this ratio holds that a firm's market value ultimately equals the replacement cost of its tangible assets. Some argue that calculating the replacement cost of assets is subject to enormous measurement errors; thus, the Q ratio is useless as a valuation tool.
ratio of the market value of a firm's assets to their replacement cost. Sometimes called Tobin's Q ratio after its inventor, the late James Tobin of Yale University.
