Looking\nGlobally with the Tobin Q<\/strong><\/p>\n\n\n\nWhile we have only discussed U.S. markets here, the Tobin Q ratio can also be applied to other country\u2019s financial markets around the world and compared to the average historical reading for each respective market. <\/p>\n\n\n\n
Looking across geographies, investors can assess opportunities for tactical asset allocations depending on each country\u2019s respective premium or discount relative to its historic average. <\/p>\n\n\n\n
Implications at the Company Level<\/h2>\n\n\n\n
At the company level, the Tobin Q ratio should be roughly equal to 1 according to economic theory but things can always stray away from this level. <\/p>\n\n\n\n
The logic behind the ratio equaling 1 is that in an efficient market, a company would be acquired by a competitor if their Tobin Q ratio was less than 1. <\/p>\n\n\n\n
On the other hand, a company with a ratio over 1 would see their business intruded on as competitors put their own investor\u2019s capital to work reproducing the assets of the business in question. This increase in competition would lower profitability across the industry driving the market enterprise value of the company in question down and thus bring the Tobin Q ratio back towards equilibrium at 1. <\/p>\n\n\n\n
Solely from the viewpoint of the investor, if the Tobin Q ratio is calculated as being above 1, it shows that financial markets are valuing investments from the company above what it costs the company to produce them. As such, additional capital investment by this company should be profitable for the investor of capital as they will yield even great market value for the company\u2019s suppliers of equity and debt financing. <\/p>\n\n\n\n
Alternatively, a Tobin Q ratio below 1 would indicate that the financial markets see any capital investment by the company as being unprofitable. Contributors of new capital to this company could expect a lower market value than the cost of their investment; which implies that no new capital would flow to this area. <\/p>\n\n\n\n
Takeaway<\/h2>\n\n\n\n
The Tobin Q ratio has some interesting implications for assessing the prices of individual firms, business projects, and the level of the financial markets as a whole. <\/p>\n\n\n\n
The ratio\u2019s asset-based method revolving around replacement value has made it a favorite among value investors as an alternative to price-to-book value. <\/p>\n\n\n\n
On the other hand, the elegant sounding replacement value has inherent subjective flaws in assigning replacement value to intangible assets<\/a>. This flaw makes it important to focus on averages and assessing relative changes overtime. <\/p>\n","protected":false},"excerpt":{"rendered":"The Tobin Q ratio is an asset-based valuation model that has found its way into many value investor\u2019s playbooks due to its economic logic based around replacement value in attempting to judge whether a company, or the market as a whole, is over or under-valued in the financial markets. The ratio was popularized by Noble […]<\/p>\n","protected":false},"author":11,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"footnotes":""},"categories":[5957,5968],"tags":[],"yst_prominent_words":[],"_links":{"self":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/8135"}],"collection":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/comments?post=8135"}],"version-history":[{"count":1,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/8135\/revisions"}],"predecessor-version":[{"id":21195,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/8135\/revisions\/21195"}],"wp:attachment":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/media?parent=8135"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/categories?post=8135"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/tags?post=8135"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/yst_prominent_words?post=8135"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}