Saturday, March 21, 2009

Tobin's "q" Ratio Continues To Decline

The Tobin's "q" ratio measures the market value of a company to the replacement cost of its net assets. This ratio can be applied on the market value for the stock market relative to the replacement cost of these companies' assets.

For the 4th quarter of 2008, Argus Research notes the "q" ratio has continued to decline to .62 which is the lowest level sine the 4th quarter of 1991.

(click to enlarge)

According to Argus:
"the ratio of total stock market value to corporate net worth is a reliable indicator of market valuation. When the stock market trades at a discount to the replacement cost of its assets, the market is inexpensive, and assets are cheaper to buy than build. This discount is reflected in "q" ratios below 1.0. Conversely, when "q" exceeds 1.0, the market trades at a premium to asset replacement costs and is considered [expensive]. The long-term average (since 1952) for Tobin’s "q" is 0.76."
Additional information on Tobin's "q" ratio can be found in one of my earlier posts that is titled Tobin's "q".


Tobin’s ‘q’ at 0.62 in 4Q ($)
Market Watch: Daily Spotlight
March 20, 2009

1 comment :

Anonymous said...

The replacement value is difficult to calculate. It is not an obvious indicator to investor.

As a broad market measure, Dow to gold ratio is more prevailing to investors.

Gold maintains historic long term constant purchasing power. So gold price actually maintains a close correlation with replacement value.