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QuestionsCategory: Financials QuadrantResearch and development (R&D) cost
ST asked 3 years ago

Hi, I have some questions about R&D cost below:
1. How many percentage of R&D is considered healthy? More specifically, I’m interested in the R&D cost for tech / software companies such as Alphabet, Apple, Microsoft etc.
2. What is the formula to assess R&D cost? Is it R&D over revenue, or R&D over profit?
Thanks for your help.

3 Answers
Victor Chng answered 3 years ago

Hi ST,
You can look at R&D over revenue to gauge their R&D spending. 
Actually, there is no fixed percentage to whether how much the company need to spend on R&D. On personal level, for those tech or research companies I prefer them to spend at least 5% or more.

Victor Lee answered 3 years ago

Hi Victor,
I thought i’ll piggyback this thread to ask a question on R&D cost instead of starting another thread. I have thought of R&D as a development capex since the product that is developed will eventually be put through the production line to generate new revenue for the company. So for example in a tech company like Microsoft, their CAPEX is PPE + R&D cost?
Thanks for the help!

Victor Chng answered 3 years ago

Hi Victor,
This site explain well about why R&D is not capex.
Below is an abstract from the site:

Research expenditures are operating expenses.
Development expenditures that are not proven feasible are operating expenses.
Development expenditures that are proven feasible are capital expenditures.
The difference is important because capital expenditures are reported on the balance sheet and are depreciated/amortized over time whereas operating expenses are reported on the income statement on the reporting date it was incurred.

Victor Lee replied 3 years ago

Thanks for the explanation :)