Q ratio is a hypothesis made up by James Tobin, which states that merged market values of all companies on the stock market are quite similar to their replacement costs. Q ratio can be also applied to any particular company.
Q ratio is calculated by dividing total market value of the company by total assets of the company. Small Q ratio, between 0 and 1, means that a company's stock is undervalued because the cost needed for replacement of one of the firms assets is greater than the value of the stock. If the Q ratio is greater than 1, it means that the company's stock is overvalued because costs of replacing one firms asset is smaller than the price of the company's stock.
