Price-To-Research Ratio - PRR

DEFINITION of 'Price-To-Research Ratio - PRR'

A measure of the relationship between a company's market capitalization and its research and development (R&D) expenses. The price-to-research ratio is calculated by dividing a company's market value by its last 12 months' worth of R&D expenditures. PRR is very important in research-based businesses such as pharmaceutical companies, software companies, hardware companies and consumer products companies. Without spending on scientific and technological work, these firms cannot generate new products, processes or services and will not grow, increase their market share or improve their profitability.

BREAKING DOWN 'Price-To-Research Ratio - PRR'

In an industry heavily dependent on R&D, the price-to-research ratio is an important indicator of a company's ability to generate profits. Increasing earnings cannot tell the whole story because a company can increase earnings by slashing R&D expenses, which may stifle long-term growth and profitability. However, a favorable price-to-research ratio does not guarantee the success of future product innovations, nor does a large amount of R&D spending guarantee future profits. What really matters is how effectively the company is employing its R&D dollars. Also, the appropriate level of R&D spending varies by industry and depends on the company's development stage.

RELATED TERMS
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  2. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  3. Research And Development - R&D

    Investigative activities that a business chooses to conduct with ...
  4. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
  5. Book Value

    1. The value at which an asset is carried on a balance sheet. ...
  6. Price-To-Book Ratio - P/B Ratio

    Price to Book Ratio (P/B Ratio) is a ratio used to compare a ...
Related Articles
  1. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  2. Insurance

    A Checklist For Successful Medical Technology Investment

    Find an investment that will give your portfolio a shot in the arm.
  3. Fundamental Analysis

    Evaluating Pharmaceutical Companies

    Learn how to find a healthy pharmaceutical investment in a market full of weak drugs.
  4. Investing

    R&D Spending And Profitability: What's The Link?

    Return on research capital (RORC), can help investors measure how much profit R&D spending actually generates.
  5. Markets

    Buying Into Corporate Research & Development (R&D)

    Investors take note: companies that cut research and development are in danger of saving today but losing big tomorrow.
  6. Fundamental Analysis

    Pharma Patent Trolls: Cheap Drugs At A Steep Price

    Though patent trolls can help patients achieve cheaper medication in the short-term, everyone pays for it in the long term.
  7. Mutual Funds & ETFs

    Investing In The Healthcare Sector

    Perform a thorough checkup to uncover a medical stock with a clean bill of health.
  8. Investing

    The Ins and Outs Of In-Process R&D Expenses

    Are these charge-offs fair accounting or earnings manipulation? Learn more here.
  9. Markets

    Understanding The P/E Ratio

    Learn what the price/earnings ratio really means and how you should use it to value companies.
  10. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  3. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  4. What is the formula for calculating the debt-to-equity ratio?

    Expressed as a percentage, the debt-to-equity ratio shows the proportion of equity and debt a firm is using to finance its ... Read Full Answer >>
  5. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  6. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center