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What is P/R&D (Price/Research and Development) Ratio for stocks? April 30, 2009

Posted by deminvest in growth stock, Internet stocks, investment, investment strategies, nasdaq, stock faq, stock ratios.
Tags: , , , , ,

Price/R&D Ratio equals to current market capitalization divided by last year R&D expenditure.

This ratio is very important to evaluate research based business. For instance a pharmaceutical company has to  invest heavily in research to replace its product as they lose patent protection or become obsolete.

Of course not all research can succeed in delivering good results, so there is no guarantee that a company with low P/R&D ratio will produce great earnings in the future.

Research and development are booked as expenses. Money which is gone like what if it was spent on electricity or heating.

This is not entirely correct, specially for Internet companies.

A transportation company that buys a new truck books it as an asset that will make money for them over its lifetime. Only the depreciation of the truck will be booked every year as expense.

An Internet Company adding a new function to its website has to book the investment as expense.

A functional website looks more like an asset than an expense. It can be a money making engine like google.com or Ebay.com . In my opinion money used to buid a new google.com feature should be booked as an asset improvement .


1. RnS - May 7, 2009

You have a remarkable knack of explaining ideas so that they are instantly clear – for example, expenses like electricity or heating. It’s very interesting that R&D companies do that.

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