Evaluating q as an Alternative to the Rate of Return in Measuring Profitability

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Abstract
The ratio of a firm's market value to its replacement cost, q, is often used to measure firms's profitability. The use of q is increasing in large part because of the growing realization that errors in evaluating firms' capital assets may cause large errors in estimates of the accounting rate of return, r. The same objection, however, applies to q. This paper reports the results of Monte Carlo experiments designed to determine whether q is superior to r. Errors in both q and r are large and potentially serious, but do not render either measure useless.

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