Price-To-Research Ratio - PRR

AAA

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.

INVESTOPEDIA EXPLAINS '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. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
  3. Research And Development - R&D

    Investigative activities that a business chooses to conduct with ...
  4. Price-To-Book Ratio - P/B Ratio

    A ratio used to compare a stock's market value to its book value. ...
  5. Book Value

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

    A valuation ratio of a company's current share price compared ...
Related Articles
  1. A Checklist For Successful Medical Technology ...
    Insurance

    A Checklist For Successful Medical Technology ...

  2. Evaluating Pharmaceutical Companies
    Fundamental Analysis

    Evaluating Pharmaceutical Companies

  3. R&D Spending And Profitability: What's ...
    Investing

    R&D Spending And Profitability: What's ...

  4. PEG Ratio Nails Down Value Stocks
    Markets

    PEG Ratio Nails Down Value Stocks

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center