|Jul21-10, 03:29 PM||#1|
Blog Entries: 3
How usefull is the Q Ratio
How important is the q-ratio?
|Aug14-10, 02:44 PM||#2|
I think exactly what you said is the problem with this method of valuation. It's the reason managers are often evaluated based on market value added, that is, the excess of a company's market value to its book value (which is just the historical form of replacement cost).
Replacing all of a company's physical assets is not the same as replicating its productivity and expected return. Even replicating intangible assets doesn't do that. Take McDonald's franchises, for instance. They're all physically identical and possess the same intangible assets (recipes, public goodwill), but they still don't generate identical returns.
Share value isn't a function of asset replacement cost for that reason; it's a function of expected future free cash flows. Human decisions, not just tangible and intangible assets, drive those.
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