Research and Development

Research and Development are activities that lead to the discovery and development of new products or improvements to existing products.

A company without Research and Development costs is a good thing. It means the company may have a business model that can withstand the ever-changing times. However, there are many great companies that have Research and Development costs.

Companies that have Research and Development costs are usually Technology, Biotechnology, and Drug Companies. Before investing in a company that has these cost, check their Research and Development to Gross Profit ratio.




For a company with a Durable Competitive Advantage:


If the company has Research and Development cost, that is if:


Use this ratio as a guide:


Examples of Companies without Research and Development Cost:

  • Coca-Cola
  • Wal-Mart
  • H&R Block

Examples of Companies with Research and Development Cost:

  • Apple
  • IBM
  • Google
  • Johnson and Johnson
  • Merck

Below is a comparison of these companies' Research and Development to Gross Profit Ratio for the year 2012.


Comparison of Research and Development to Gross Profit Ratio

Company Research and Development for the Year 2012 (Millions) Gross Profit for the Year 2012 (Millions) Research and Development to Gross Profit Ratio
Apple $3,381 $68,662 4.9%
IBM $6,302 $50,298 12.5%
Google $6,593 $29,670 22.2%
Johnson and Johnson $7,665 $45,566 16.8%
Merck $7,911 $30,821 25.7%


For technology companies, Apple and IBM have very low Research and Development to Gross Profit Ratio, they are at 4.9% and 12.5% respectively. Even though Apple's ratio is very low, their profits mostly comes from the sale of electronics. Electronics become outdated in just a few years. What will happen if Apple fails to create the next big thing? On the other hand, IBM comes in at 12.5%, they are in the business of providing services. In other words, IBM's profits mostly come from providing computer services. Warren Buffet loves companies that provide unique services.

Google is at 22.2% which is close to the threshold of 20%. At this time Google is in the business of innovation. They have to spend much of their profit on Research and Development to keep their technology up to date. Without innovation, Google's technology could become obsolete.

As for biotech companies, Johnson and Johnson is at 16.8% while Merck is at 25.7%. Johnson and Johnson has a diversified consumer products business. They make shampoo, soap, mouthwash, etc., - things people buy every month - along with creating new medication. Merck is in the business of solely creating new medication. Patents expire, so Merck has to invent new blockbuster drugs to stay in business.


My Financial Analysis of Stocks

  • We Have Bottomed, Next Stop Dow Jones 100,000 The bottom of this recession was on March 23, 2020, when the Dow Jone hit 18,214. This recession was short-lived, it only lasted about 3 months. Our Gross ...
    Posted Jun 8, 2020, 12:32 PM by Intelligent Investor
  • Archive: My Stock Research 2019 View My Analysis: My Stock Research 2019
    Posted May 21, 2020, 9:21 PM by Intelligent Investor
  • Archive: My Stock Holdings 2019 View My Analysis: My Stock Holdings 2019
    Posted May 21, 2020, 9:21 PM by Intelligent Investor
  • Another Dead Cat Bounce, We Haven't Bottomed Yet, Goldman Predicts S&P 2000 The Dow Jones has rallied to 22,327 over the past several days. However, we believe this is another dead cat bounce. We sold all our shares of United Health ...
    Posted Mar 30, 2020, 8:35 PM by Intelligent Investor
  • Coronavirus Is The Black Swan Event That Ended The Bull Market In 2020 A Black Swan Event is an unpredictable event that causes catastrophic damage to an economy. A few days ago, we wrote an article describing the coronavirus as a Black Swan ...
    Posted Mar 18, 2020, 9:21 AM by Intelligent Investor
  • Beyond Meat (BYND) and Dunkin (DNKN), The End Of A Tale Of 2 Speculative Stocks During a recession speculative stocks get pounded down to the ground. Thus, we sold all of our shares of Beyond Meat (BYND) and Dunkin' Donuts (DNKN). Beyond Meat is in ...
    Posted Mar 18, 2020, 9:22 AM by Intelligent Investor
  • The Dow Jones Rallies 1294 Points, Sold More Stocks On This Dead Cat Bounce The Dow Jones jumps 1294 points a few days ago, however, we believe that this rally is a "dead cat bounce". We have to wait for the next quarter's ...
    Posted Mar 16, 2020, 9:56 PM by Intelligent Investor
  • We Panic Sold Today was a really bad day in the market. The Dow Jones opened at negative 1000 points. It seems as if the coronavirus is gaining steam and is about to ...
    Posted Mar 18, 2020, 9:23 AM by Intelligent Investor
  • I'm Calling Tops, It's Over, The Bull Market Is Over, Here Comes The Bear Market, A Recession Is Coming We weren't sure yesterday that the bull market is over. In the morning today, the Dow Jones was up about 300 points, and I thought we were just having ...
    Posted Mar 1, 2020, 10:47 AM by Intelligent Investor
  • Went On A Selling Spree Today I think this stock market bull run is over. I just have a hunch that it's over. However, I've been wrong before. The deadly coronavirus outbreak seems to ...
    Posted Feb 24, 2020, 10:41 PM by Intelligent Investor
Showing posts 1 - 10 of 49. View more »