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

The price-to-research ratio (PRR) measures the relationship between a company's market capitalization and its research and development (R&D) expenditures. The price-to-research ratio is calculated by dividing a company's market value by its last 12 months' worth of expenditures on research and development. Market value is found by multiplying the total number of shares outstanding by the current stock prices. The definition of research and development expenditures may differ from industry to industry, but companies in the same industry generally follow similar definitions of R&D expense.

R&D expenses may include expenses related to such items as pure research, technology licensing, the purchase of proprietary technology from third parties or the cost of getting innovations through regulatory hurdles. R&D expenses are usually disclosed and explained in the income statement or the relevant footnotes of published accounting statements.

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

Price-to-research ratio (PRR) is a comparison of how much money a firm spends on research and development in relation to its market capitalization. The ratio is most important in research-based businesses such as pharmaceutical companies, software companies, hardware companies and consumer products companies. In these research-intensive industries, investment in scientific and technical innovation is critical for success and long-term growth, and can be an important indicator of the company's ability to generate profits in the future.

Interpreting the Price-to-Research Ratio

In comparison across peers, a lower price-to-research ratio may be considered appealing, as it may indicate that the company is heavily invested research and development, and is perhaps more likely to succeed in producing future profitability. A relatively higher ratio may indicate the opposite, that the company is not investing enough in future success. However, the devil is in the details, and the lower price-to-research ratio firm may just have a lower market capitalization, and not necessarily better investment in R&D.

Similarly, a relatively 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. In addition, the appropriate level of R&D spending varies by industry and depends on the company's development stage. As with all ratio analysis, the price-to-research ratio should be viewed as one piece of a large mosaic of data used to inform an investment opinion.

RELATED TERMS
  1. Price/Growth Flow

    Price-Growth Flow is a measure of a company's earnings power ...
  2. Accounting Ratio

    Accounting ratios, also known as financial ratios, are used to ...
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ...
  4. Operating Ratio

    A ratio that shows the efficiency of a company's management by ...
  5. Price/Earnings To Growth - PEG ...

    Price/Earnings to Growth (PEG) is a stock's price to earnings ...
  6. Activity Ratios

    Accounting ratios that measure a firm's ability to convert different ...
Related Articles
  1. Investing

    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.
  2. Insights

    And The King of R&D Spending Is

    When it comes to investing in other countries, knowing how much is being spent on research and development, and where it's be spent, is important for any investor.
  3. Investing

    Key Financial Ratios for Pharmaceutical Companies

    Because of the unique requirements for bringing products to market, pharmaceutical industry stocks are best analyzed by using certain key financial ratios.
  4. Insurance

    How To Do Qualitative Analysis On Biotech Companies

    These analytical methods will help you size up a biotech company and make a winning investment.
  5. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  6. Investing

    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.
  7. Investing

    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.
  8. Investing

    CapEX Kings: Which S&P 500 Cos. Spend the Most

    Goldman Sachs is out with a report showing the importance of capex spending.
  9. Investing

    Key Financial Ratios for Retail Companies

    Using the following liquidity, profitability and debt ratios, an investor can gather deeper knowledge of a retail company's short-term and long-term outlook.
  10. Investing

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
RELATED FAQS
  1. What are the benefits of R&D (research and development)?

    Learn about the many benefits of research and development (R&D) efforts for companies in competitive markets, including the ... Read Answer >>
  2. 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. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center