DEFINITION of 'Price/Growth Flow'

Price-Growth Flow is a financial metric that identifies companies producing solid earnings and making hefty investments in research and development (R&D). It is measured using the following formula: 

Price/Growth Flow

BREAKING DOWN 'Price/Growth Flow'

Price-Growth flow is an expression of earnings power and potential growth against the current price per share. Analysts look at the metric for a window into a company's capital allocation structure. For example, management may spend more on developing new products and services than on current profit centers. The thought is that low earnings can be compensated with greater R&D spending and vice versa. If a company decides to spend on today and neglect the future, current earnings per share may exceed R&D spending. Both cases result in a high reading of the ratio, meaning solid earnings per share or R&D spending. That way investors can evaluate potential earnings growth now and in the future.

But price-growth flow isn't telling of how effectively management allocates capital. A large R&D bill, for instance, does not guarantee new product launches or market implementations will generate profits in future quarters. Meanwhile, robust earnings growth fails to give investors insight into future prospects or growth opportunities. An optimal ratio is one which strikes a balance between earnings and R&D without tilting entirely to one metric. In the case that price-growth flow records a low reading, it tells investors that price deviated well beyond fundamentals. In short, market activity is being driven by something other than current earnings growth or potential innovation. It could be political, economic or something completely unrelated driving day to day movement. In that case, investors would be wise to monitor the news cycle, economic data or other financial metrics like price-to-sales and price-to-book. 

Other Types of Financial Ratios 

Price-growth flow is a popular method of measuring current and future earnings power, but in some cases, other financial metrics provide more clarity into a company's fundamentals or stock price. They include price-to-sales which compare a full year of revenue to market capitalization and price-to-book, a measure of a stock's market value to its book value. Both metrics compare a specific line item on the balance sheet or income statement to the stock market's value. Investors toy with various financial ratios when assessing the growth prospects of an industry or single stock. For example, price-to-book is widely considered an accurate valuation tool for the financial industry, since the stock price of banks and financial institutions rarely deviate from its book value. 

  1. Return On Research Capital - RORC

    Return On Research Capital is a measure to assess the revenue ...
  2. Metrics

    Metrics are parameters or measures of quantitative assessment ...
  3. Capital Flows

    Capital flows entail the path that money travels through corporations, ...
  4. Earnings

    Earnings typically refer to after-tax net income or a company's ...
  5. Operating Cash Flow Margin

    Operating cash flow margin measures cash from operating activities as ...
  6. Cash Flow Per Share

    Cash flow per share is a measure of a firm's financial strength, ...
Related Articles
  1. 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.
  2. Investing

    Earnings Sustainability: The Key To Your Investing Future

    Learn how to analyze earnings sustainability - an important part of making sound investments.
  3. Tech

    Apple Is Most the Innovative Company (AAPL)

    But the real news is the R&D spending shift away from products to software and services.
  4. Investing

    Free Cash Flow Yield: The Best Fundamental Indicator

    Cash in the bank is what every company strives to achieve. Find out how to determine how much a company is generating and keeping.
  5. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
  6. Investing

    3 Red Flags for Value Stocks (KMI, FCX)

    Assess the components of Warren Buffett's value investing technique, and analyze the additional financial metrics to consider when diving into today's market.
  7. Investing

    How to Identify Mispriced Stocks

    Find out how to identify mispriced stocks. Learn about intrinsic and relative valuation methods based on fundamentals, and technical analysis.
  8. Investing

    Using The Price-To-Book Ratio To Evaluate Companies

    The Price-To-Book (P/B) ratio can be an easy way to determine a company's value, but it isn't magic!
  1. How much of a drug company's spending is allocated to research and development on ...

    Pharmaceutical companies spend, on average, about 17% of revenues on research and development (R&D), one of the biggest spenders ... Read Answer >>
  2. What metrics can be used to evaluate companies in the financial services sector?

    Explore some of the various equity evaluation metrics that can best be used to assess companies in the financial services ... Read Answer >>
  3. Why do shareholders need financial statements?

    Discover the importance of a company's financial statements for stock shareholders in evaluating their equity investment ... Read Answer >>
  4. Which metric should I pay more attention to, EV/EBITDA or P/E?

    Examine and compare the relative advantages and disadvantages of the two equity evaluation metrics, EV/EBITDA and the price-to-earnings ... Read Answer >>
Trading Center