What is Research & Development – Defined

Research & Development, or, R&D, are line items in a company’s financial statement.  R&D is found within the operating costs and are a cost incurred by the company to research new products and develop these products for the company to sell.  This process an organization undertakes may lead to patents which would give a firm a competitive advantage in the marketplace.

The entry for the costs incurred by a firm for Research & Development is entered into the Operating Costs section of the financial statements.  This is grouped together with Sales, General, & Administrative (SG&A) and along with Depreciation & Amortization (D&A) is deducted from Gross Profits.

Research & Development as a Cost

Research & Development, as a cost, is included in Total Operating Costs.  Once total operating costs are calculated for a firm they are deducted from gross profits giving the total for Operating Profits.

Research & Development would be included within Total Operating costs when calculated for operating efficiencies.

Understanding how much a firm spends on research and development versus total revenue as well as a portion of total operating costs may be useful to determine how efficient a firm is for determining what will likely occur in the future for patents and potential revenue.

Using ratios as a strategic method of analyzing stocks is one way to compare companies versus easy other.  Ratios are covered extensively in the Value Investing Video course.

Determining Ratios

To understand how much of a firm spends relative to a metric within the financial statements, an analyst would need to take the total amount that is spent in a period of time and divide that over the metric to be considered.

For instance, an analyst would be able to determine how much R&D is being expended as a percentage of total operating costs.   This would be done by taking the R&D divided over the Total Operating Costs.  This yields a percentage.

Another metric possibility would be R&D divided over total revenue to determine what percentage of R&D is expended versus total revenue.  Again, this yields a percentage.

All of this information is important in understanding How To Invest For Beginners – How to Invest in Stocks and can be applied to value investing techniques.

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