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-To-Innovation-Adjusted Earnings

    A variation of the price-to-earnings ratio (P/E ratio) that takes ...
  2. Research And Development (R&D) ...

    Any expenses associated with the research and development of ...
  3. Price/Growth Flow

    A measure formulated to identify companies that are producing ...
  4. Research And Development - R&D

    Investigative activities that a business chooses to conduct with ...
  5. Return On Research Capital - RORC

    A calculation used to assess the revenue a company brings in ...
  6. Stock And Warrant Off-Balance Sheet ...

    A financing option developed to help biotechnology companies ...
Related Articles
  1. Active Trading

    Which Is Better: Dominance Or Innovation?

    Find out how to assess and evaluate both these values in the market and your portfolio.
  2. Technical Indicators

    Key Financial Ratios to Analyze Biotech Companies (AMGN, GILD)

    Explore the rapidly growing biotechnology industry, and learn some of the key financial ratios investors use to analyze companies in the industry.
  3. Investing

    How To Do Qualitative Analysis On Biotech Companies

    These analytical methods will help you size up a biotech company and make a winning investment.
  4. Active Trading Fundamentals

    Pfizer's 3 Key Financial Ratios (PFE)

    Learn about three important financial ratios that help understand Pfizer, Inc. business and analyze the company's financial statements.
  5. Professionals

    Capitalizing Intangible Assets

    CFA Level 1 - Capitalizing Intangible Assets. Learn the rules governing the capitalization of various intangible assets. Includes notes on capitalizing R&D, software, patents and brands.
  6. Investing Basics

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  7. Active Trading Fundamentals

    Johnson & Johnson's 3 Key Financial Ratios (JNJ)

    Learn about Johnson & Johnson and its financial ratios, such as operating margin, return on invested capital (ROIC) and capital outlays as a percent of sales.
  8. Technical Indicators

    Key Financial Ratios to Analyze Tech Companies

    Understand the technology industry and the companies that operate in it. Learn about the key financial ratios used to analyze tech companies.
  9. Brokers

    Catching Comeback Stocks For Clients

    We'll give you the clues you need to assess which stocks can make a turnaround.
  10. Investing Basics

    The Industry Handbook: Biotechnology

    Biotechnology uses of biological processes in the development or manufacture of a product or in the technological solution to a problem. Since the discovery of DNA in 1953, and the identification ...
RELATED FAQS
  1. How much of a drug company's spending is allocated to research and development on ...

    Explore the level of spending on research and development in the pharmaceutical sector, and how it compares to R&D spending ... Read Answer >>
  2. Why should companies invest in research and development?

    Understand why companies should invest in research and development. Learn the specific ways R&D can keep a company relevant. Read Answer >>
  3. What are the benefits of research and development for a company?

    Learn about the many benefits of research and development (R&D) efforts for companies in competitive markets, including many ... Read Answer >>
  4. What country spends the most on research and development?

    Discover which country spends the most on research and development, in both dollar terms and as a percentage of gross domestic ... Read Answer >>
  5. What percentage of an electronics company's spending is typically spent on research ...

    Examine the electronics sector and learn what percentage of an electronics company's spending is usually allocated to research ... Read Answer >>
  6. What is the difference between efficiency ratios and profitability ratios?

    Learn about efficiency and profitability ratios, what these ratios measure and the main difference between efficiency and ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center