Return on Research Capital

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Definition: Return on Research Capital

The ratio of revenue generated by the company after the company has invested into research and development activity to the amount of expenditure incurred gives the return on Research Capital (RRC). Clearly it’s a productivity and growth indicator and are mostly used in industries which are heavily dependent on R&D. A high RRC indicates that the company is benefitting from the R&D activities and on other hand the investors can take decisions on whether the R&D is actually contributing towards financial performance or not.

The ratio looks like RRC= Current years gross profit/ Previous years R&D expenses. We use gross profit instead of net profit or net operating profit as it gives a better formulation as to how the company is reaping its R&D benefits. However the formula takes another assumption that whatever has been invested into R&D is reaping profits on an average the next year. This seems to be a problem when big R&D initiative is called into question which takes greater time to bear results.

For eg, Apple invested $1.109 billion in 2008 and their P&L statement gives its 2009 earnings in gross margin to be $13.14 Billion. Thus they have$11.84 (13.14/1.109) per R&D dollar invested. Similarly for Nokia if we take the same figures for 2008 and 2009, they come up to be $17.58 billion and $7.87 billion. Which reveals that Nokia has earned $2.22 (17.58/7.87) on each R&D dollar invested. This difference in RRC of the two companies can be very well explained as Apple invested in R&D across multiple product line which all complimented each other. Whereas Nokia invested its money into 3 different operating software systems which only resulted in revenue generation for one of its business.



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