Dating men with no money
Research and development (R&D) is fundamental to a company's long-term success: R&D fuels new products, market share, high margins and rates of growth.In hard times, however, companies can be tempted to cut back on the expenses devoted to the scientific and technological work that underlie new products, processes and services - these expenditures can be among the most capital intensive parts of a company's cost structure.Putting a premium on real growth rather than trying to boost earnings through cost cutting, each of these two companies rose to the top on the strength of R&D investments that rival those of any Silicon Valley firm.That said, R&D by itself doesn't guarantee a good investment.Price/growth flow attempts to identify companies that are producing solid current earnings while simultaneously investing a lot of money into R&D.To calculate the growth flow, simply take the R&D of the last 12 months and divide it by the shares outstanding to get R&D per share.The argument goes that the more patents filed, the more productive the R&D department.
One way, however, to perceive the proficiency of R&D is to calculate the percentage of sales that come from products introduced over a period of time, say the preceding three years.
But investors should recognize that when the cycle turns upward, companies with new products coming out of the development pipeline are better positioned to profit than those companies that slashed R&D in the previous recession.
In addition, big R&D budgets are normally an indicator of ample financial resources, so a telling sign of a company in trouble is earnings growth through severe cuts in R&D. Consider Procter & Gamble's leadership in detergents and disposable diapers, or Gillette's edge in shaving.
Some companies see a payoff from spending heavily on R&D.
Apple Computer, for instance, devoted large amounts to R&D during the company's unprofitable years of 19, but Apple saw earnings skyrocket with the 1998 launch of its successful i MAC product line.