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How usefull is the Q Ratio

  1. Jul 21, 2010 #1
    How important is the q-ratio?

    I'll agree that if the company can be replaced at a lower cost then buying it's stock then it is likely over valued. I will also agree that if the price to earnings isn't so hot the Q-ratio is perhaps another good measure to look at. However, how tangible are the assets of a company. The company includes more then just buildings and machinery. It also includes, people, trade secretes, patents, work processes, brand value and business contacts. I'm sure some of these things are included in the value of the companies assets but recreating the company is not always an easy process. It requires a pool of labour which includes the right skills and expertise to draw from.
     
    Last edited by a moderator: Apr 25, 2017
  2. jcsd
  3. Aug 14, 2010 #2

    loseyourname

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    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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