The argument is-similar to investing in a long term asset, R&D spending as an expense should be capitalized (depreciated) over several years instead of taking it as an upfront cost and possibly depressing short term earnings. This is because of the accounting standards at this time, though there has been discussions about having the accounting of this metric changed to reflect the fact that much R&D spending is useful over many years of a company’s life instead of just one. Note: Keep in mind that as of the writing of this post, early 2021, R&D expenses are currently part of the income statement and are expensed over one year instead of several. R&D as a % of revenue = Research & Development Expenses / Revenue Although it’s not an official metric, we can use common sense to create our own ratio and compare it across the entire S&P 500 (over 20 years). It’s all situational, which is why comparing R&D spend to a company’s competitors and historical trends is a much more useful exercise than simply looking at the percentage figure on its own.Ĭalculating this ratio is quite simple. How to Best Apply the R&D Spending to Revenue Ratio That’s not to say that all high R&D spending companies are poor investments-a high tech company might not need to spend much on marketing at all compared to a consumer-facing brand who doesn’t need to innovate. This makes sense, as a technology firm who depends on innovating its products and services in order to remain cutting edge, will need to spend aggressively to keep its market share.Ĭompare this to a dependable consumer brand company, who doesn’t need to innovate their product hardly at all and can simply produce the same product each year. You’ll find that the amount of R&D spend compared to a company’s revenues tends to vary greatly depending on their industry. Generally, an income statement is broken up into the following main components: R&D spending is a main operating expense which is part of a company’s primary P&L, or income statement. Watching trends in R&D spending, particularly as a percentage of revenue, can help investors get an idea of how forward thinking a company is being. Research and Development, or R&D, spending is a critical expense for companies looking succeed in the future-depending on which industry that company is in.
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