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.

  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. Price-To-Book Ratio - P/B Ratio

    Price to Book Ratio (P/B Ratio) is a ratio used to compare a ...
  5. Book Value

    1. The value at which an asset is carried on a balance sheet. ...
  6. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
Related Articles
  1. Insurance

    A Checklist For Successful Medical Technology Investment

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

    Evaluating Pharmaceutical Companies

    Learn how to find a healthy pharmaceutical investment in a market full of weak drugs.
  3. 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.
  4. Markets

    PEG Ratio Nails Down Value Stocks

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

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  1. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  2. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  3. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  4. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  5. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  6. What is the formula for calculating weighted average cost of capital (WACC) in Excel?

    When analyzing different financing options, companies need to look at how much it will cost to fund operations. There are ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!