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.
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.