R&D stands for Research and Development on a company’s financial statement. This expense is usually misunderstood and overlooked by many investors. Let’s take a quick look at how we can use this to our advantage.
Similar to “Cost of Goods”, R&D entails the company’s cost of reinventing new products and their costs of production. These expenses may vary, but technology companies can spend huge sums of money in this category. When GOOGL (Google/Alphabet, $1,144.23) may spend 25% of their gross profit on R&D (which is very good for such a superior corporation), AMD (Advanced Micro Devices, $16.50) spends almost 65% of their gross profit on R&D to survive and keep up with their competitors.
Look for consistent numbers in this area.
Some companies may need to spend more than others, however if prices continues to fluctuate year after year, this can be a warning sign of poor management. Depending on which sector you may be investing in, investors tend to look for consistent numbers in this area. INTC (Intel, $55.00) similar to GOOGL, is known for consistency spending 25% of their gross profit on R&D expenses.
These expenses are very important and investors. Calculating a company’s expenses is an exceptional way to discover their long-term stability over the next five to ten years. Some investors take a step further and combine the SGA and R&D percentages to calculate how much the company overall spends from their gross profit. Yet, every investor makes different calculations in regards to their own investing style.