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Definition: Price to Research Ratio
It is defined as the ratio of market cap of the company to its past year expenditure on R & D. Price to research ratio is used as a measure of current stock price of the company as compared to its ability to generate future profit with new and innovative products. It can be referred as a comparison of how much a company invests in R & D and how much value the market sees in its stock.
Price to research ratio = Current Market Capitalization of the company / R & D expense for the company
Research and development is a manifestation of a firm’s commitment to innovation, hence the lower the ratio the more the company gives value to innovative products and hence confirms the capability of the company to produce future profitability.
Though price to research ratio does not give a surety of materialization of future profits for the company nonetheless it gives a ground for comparing companies within same industries. Thus when we compare companies within an industry which demands continuous innovation in its products, R & D investment is an important parameter for measuring company’s future performance. For Example PRR is very important in research based businesses like pharmaceutical industry, consumer product industry, software industry etc.
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