The Tobin Q Factor is a factor created by James Tobin and it is based upon the assumption that the combined market value of all the companies in a stock market should be the same as their replacement costs.
The Tobin Q Factor is also known as the Q ratio and is defined as:
Total Market value of the firm / Total Asset value
If you divide the “Total Market value of the firm” and the “Total Asset value” by the number of shares in that the company has then you can compare the Share price against the asset value per share to find out if the investment trust is over or under priced.
With Tobins Q Factor, the current and expected future probability of investment are shown. This factor has two main things to consider:
- Current and future profits of the company – The Q Ratio reduces the guesswork required for future company profits
- No delay in changes – Significant changes in the Stock Market will immediately change the values in the Tobin Q Factor.
Web-links are provided below to give you more information and understanding on Tobins’ Q Factor.
Investopedia – http://www.investopedia.com/terms/q/qratio.asp
Economics Discussion – http://www.economicsdiscussion.net/investment/investment-function/theory-of-tobins-q-concept-implications-and-factors-investment-function/16063http://www.economicsdiscussion.net/investment/investment-function/theory-of-tobins-q-concept-implications-and-factors-investment-function/16063