Tobin’s Q Ratio

Many analysts hypothesized that the market value of a firm should be more or less equal to its replacement cost. The ratio of market price to replacement cost is known as Tobin’s q which was devised by Nobel-prize winning economist James Tobin. A low Q < 1 implies that the value of a firm is less than its replacement cost and hence the stock is undervalued. Conversely, a Q > 1 implies that the stock is overvalued.

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