- #1
John Creighto
- 495
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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.
More sober and historically reliable measures of market valuation create a much more challenging picture. Apart from our own measures, which indicate continued overvaluation, there are several good indicators of market valuation that are not overly sensitive to year-to-year fluctuations in profit margins. One is based on the 10-year average of actual net (not operating) earnings, which is advocated by economist Robert Shiller, and another is Tobin’s "q" ratio which is based on comparing market value to replacement cost, and is advocated by Andrew Smithers. Both of these measures largely agree with our own measures, both presently and on a historical basis. Based on last week’s valuations, both suggest that the S&P 500 is substantially overvalued.
Read more: http://www.creditwritedowns.com/2010/07/john-hussman-on-taxes-and-tobins-q-ratio.html#ixzz0uLmVvAe9"
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.
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