Price-To-Research Ratio - PRR

Lollapashoesa, Inc., premier retailer of fine footwear and foot accessories, has embarked on its biggest R&D project yet. Its goal is to create a fashionable high heel that won’t hurt the feet, even after a 10-hour workday or a night spent cutting a rug at our second cousin’s wedding. It’s an ambitious goal, to be sure, and Lollapashoesa figures they’ve spent about $25 million on their research and development efforts. That’s a lotta dough. But if they can pull this off, they estimate they’ll be able to bring in an extra $100 million in shoe sales over the next three years, which is even more dough.

But do the financial experts think this venture is worth it? To answer that question, we’ll need to figure out Lollapashoesa’s “price-to-research ratio,” or PRR. Ready for some math? We are too, so here goes. We calculate a company’s PRR by dividing their market capitalization (MC) by their R&D expenditures over the last 12 months (RD). Let’s say Lollapashoesa’s market cap is $230 million, which gives us:

MC/RD = 230,000,000/25,000,000 = 9.2

9.2 is right in the PRR sweet spot, according to Kenneth Fisher, the dude who invented this metric. Companies with a PRR between five and ten are, he says, redirecting a good portion of their cash back into R&D, which bodes well for future earnings. Therefore, they might be a good investment choice. Will this always be true? Not if the company in question is investing all its R&D cash in a venture that will never sell. But in the case of Lollapashoesa and the miracle stiletto, we’re willing to bet their investment—and our investment in their organization—will pay off in spades.