How to Measure the Competence Value (from the Q Ratio to the T Ratio)

Abstract

A practical application of the T ratio methodology is illustrated over a sample of more than 3,000 companies of the very entrepreneurial district of Treviso, North-Eastern Italy. The hurdle rate of return is computed by adopting to the “confident equivalent” methodological framework, an original evolution of the “certainty equivalent” proposed by Lintner (1965, The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, in The Review of Economics and Statistics, 47, 13–37), compliant with the Fisher Black’s zero-beta model (1972, Capital market equilibrium with restricted borrowing, in Journal of Business, 45(3), 444–455). The missing overlap between competence (T ratio) and competitiveness (Q ratio) is exploited, since 10%, only, of the examined companies have both sound values. By financing the 42% high-Q companies, only, you also source the 32% (=42–10) with no long term performance persistence, but avoid to finance the 21% high-T companies with no short-term results being at the initial stages of their entrepreneurial cycle.