Do It Yourself Stock Investor

Return on Research Capital (RORC)

July 19, 2015

While you watch Shark Tank and think about your money making idea, remember one of the greatest criterion: "Who cares?". Three basic things that we have learned as armchair inventors: (a) does your idea matter; (b) is it proprietary; and (c) can it bring in big money?

If you can't come up with any bright ideas for yourself; invest in the ideas of others. However, you might not have enough money to volley for equity and royalties the same way that sharks do. The alternative for the retail investor is to get a piece of a good company via the open markets such as the NYSE and NASDAQ.

When sizing up a company's great ideas, a metric called the Return on Research Capital (RORC) can assist in measuring the success of their inventions. The RORC metric is comprised of the most recent annual gross profit divided by the previous annual expenditure for Research and Development (R&D).

Take for example Apple, Inc. (NASDAQ: AAPL), which is known for their iPad, iPhone, Mac computer, etc. For the 2014 fiscal year they made approximately $180 billion; a 7% increase over fiscal year 2013. The 2014 gross profit was $70,537,000 for a gross margin of 39%. In fiscal year 2013 they spent $4,475,000 on R&D. Thus the RORC metric: $70,537,000 / $4,475,000 = $15.76. This shows that for every dollar spent on R&D, the company returned nearly sixteen dollars in gross profit.

Comparing Different Types of Companies to Apple's RORC
Qualcomm, Inc. (NASDAQ: QCOM) produced $26.5 billion dollars in revenue for fiscal year 2014. They create processors and other products to enhance digital communication. In their words, "We are engineers, scientists and business strategists." Also worth tracking is their partnership with Google for the Lunar XPRIZE. This is a series of contests supporting the successful launch of robots to the moon for exploration and streaming video. The time-line is a part of a larger 2017 target with other barnstormers of space. Qualcomm Inc. had a 2014 RORC of $3.23.

Netflix, Inc. (NASDAQ: NFLX) has been one of the highest performing equities of 2014-15. At the market close of July seventeenth, the 52 week range for price-per-share was a low of $45.08 and a high of $117.88. Is the streaming video business more productive with R&D than tech and communications? The metric can help with that answer: Netflix, Inc. had a 2014 RORC of $4.63.

Even with IPO momentum and an epic fan base, GoPro, Inc. (NASDAQ: GPRO) is a distant second to Apple. Without an iTunes equivalent, GoPro video cameras aren't enough to rival the returns. Perhaps in a few more years, this new publicly traded company can increase their gross profit to R&D ratio. Their 2014 gross margin was below 50%, but a significant improvement from the prior year of 2013. GoPro, Inc. had a 2014 RORC of $8.51.

Return on Research Capital graph