Topic: How To Invest

What is Pat’s commentary for the week of March 21, 2018

Article Excerpt

Successful investors recognize that when a company spends money on research and development, it can create a hidden asset with the potential to expand the company’s long-term profit. Companies have to treat research and development spending as a day-to-day expense, much like maintenance or tax payments. As a result, this spending comes right out of the current year’s earnings. This tends to lower the company’s current earnings, since the spending takes time to have an impact (and, in fact, it may not pay off). This pay-now, profit later (if at all) process tends to inflate a company’s price-to-earnings ratio, or P/E. That’s because the spending cuts the company’s earnings—the “E,” or denominator, of the P/E ratio. As the E shrinks, the P/E ratio rises. While high research spending can make a business look less profitable than it really is, if it’s invested wisely, it is more like a long-term investment than an expense. When research pays off, it can yield dramatic long-term…

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