Tobin’s q is a valuation measure closely related to Price-to-book (P/B) and residual income models. It expresses the ratio between the market value of the firm (debt and equity) and the replacement value of its assets.
q = (MV Debt + MV Equity)/(Replacement cost of assets)
Although Tobin’s q is a similar concept to Price/Book, there are important differences. First, the numerator includes both debt and equity and thus measures the total firm value rather than the value of equity. For consistency, the denominator includes total assets rather than merely net assets. A further difference is that the assets are measured at current, rather than historic value.
A higher value for Tobin’s q indicates that assets are being used more effectively. In practice, it is difficult to measure Tobin’s q due to limited availability of information concerning replacement value of assets.