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.