By Leigh Howe
How do you identify innovative companies? Using R&D intensity, patent information, and other financial information can help you pinpoint companies that are not only innovative but also successful.
R&D intensity. R&D spending as a percentage of sales revenue is also known as R&D intensity. High intensity is expected from companies that live by innovating. Drug companies generally lead the way with an average of 12.8% of sales revenue devoted to R&D. A quick measure of the importance a company places on innovation can be made by comparing its R&D intensity with the industry average. But the money invested in R&D measures only the importance a company places on innovation, not how well it innovates.
Paying attention to patents. Look at the patents that a company is granted, along with analyzing R&D spending. New knowledge as registered in patents is the direct product of R&D spending. Taking patent research one step further, CHI Research of Haddon Heights, New Jersey, counts patents, calculates patent growth rate, and then quantifies the value of patented technologies. For an annual fee, researchers and investors can get CHI’s monthly “Investor Tech-Line” which reports on 350 leading U.S. patent producers. Each report places companies on a “current impact index” by checking how often their patents are cited in all U.S. patents. A recent article in MIT’s Technology review shares some of CHI’s research in the Patent Scorecard 2002.
Spot the companies that match their R with their D. Just because a company spends a lot of money on research doesn’t mean they are able to develop their inventions into commercial success. Michael Murphy of Technology Investing Online suggests looking at earnings and debt along with R&D expenditures to determine those companies that have effective R&D spending. Murphy looks for at least 50% of a company’s revenue to come from products introduced in the last three years.
One more tip. Do not look highly upon those companies that cut R&D in a downturn. While short term savings are realized, reducing R&D hurts long-term revenue growth.
For more information:
- MIT Technology Review Patent Scorecard: www.technologyreview.com/scorecards/patent_2002.asp
- Bloomberg Personal Finance: www.bloomberg.com/personal/0205/may.ft.rd.pdf
- Forbes: www.forbes.com/asap/2002/0624/064_print.html
- Technology Investing Online: www.techinvestingonline.com