Q

1 Q Ratio or Tobin’s Q Ratio

Market value of firm’s assets divided by replacement value of firm’s assets. It can be approximated by market/book ratio.

2 Quality Financial Statements

Analysts sometimes speak of the quality of a firm’s earnings, or the quality of its balance sheet. In general, quality financial statements are those that accurately reflect reality; they lack accounting tricks and one-time changes designed to make the firm appear stronger than it really is. Financial statements reflect reality when accounting income is a good approximation to economic income.

2.1 The Balance Sheet

A quality balance sheet typically shows conservative use of debt or leverage, which keeps the potential of financial distress due to debt service quite low. Limited use of debt also implies the firm has unused borrowing capacity; should an attractive investment opportunity arise, it can draw upon that unused capacity to invest wisely for the shareholders’ benefit.

A quality balance sheet shows...