Tobin’s Q also Q ratio and price-substance value ratio (Tobin’s Q)

The combined market value of all the companies on the stock market should be about equal to their replacement costs. Tobin’s Q ratio is calculated by dividing the market value of assets by their replacement value). – In relation to a company, the ratio of the market value of the company to the replacement costs of all the company’s own assets. If this ratio is greater than one, it means that the company is trading more expensively on the stock market than the total of its assets. Such added value can be explained by the fact that a company generates higher earnings than can be assumed on the basis of the existing assets. Corresponding expectations regarding the company can also justify the added value. – However, if this ratio is less than one, then the company is obviously undervalued on the stock market: the market value is less than the assets owned by the company. – The great difficulty in dealing with these ratios lies in the appropriate valuation of the assets. For example, the difference in valuation between IFRS and GAAP at Deutsche Bank AG amounted to a good EUR 300 billion in 2009. Until all valuations are based on a strictly uniform yardstick, Tobin’s Q will be of relatively little use in practice – and thus also for investment decisions.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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