What is tobin q?

Tobin Q is a financial ratio that measures the market value of a company relative to the replacement cost of its assets. It was developed by James Tobin, an American economist, in 1969.

The formula for Tobin Q is:

Tobin Q = Market value of the company / Replacement cost of assets

A Tobin Q of 1 indicates that the market value of the company is equal to the replacement cost of its assets. A Tobin Q greater than 1 suggests that the market values the company higher than what it would cost to replace its assets, indicating that the company is generating excess profits or good returns on its assets. Conversely, a Tobin Q less than 1 suggests that the market values the company lower than what it would cost to replace its assets, indicating that the company may be experiencing economic difficulties.

Tobin Q is commonly used to assess the investment opportunities of a company, providing insights into the company's financial health and profitability. It can also be used to compare the valuations of different companies within the same industry.