Companies earn their revenue from selling innovative products and services. That's one big reason investors from Kenneth Fisher to Michael Murphy have long touted the importance of following a company's research and development expenditures. But does this mean that greater R&D spending will lead to a greater stock market return? In the following video, Fool contributor Kevin Chen finds that there may be an upward trend between the two.
Analyzing IBM (NYSE:IBM), Baidu (NASDAQ:BIDU), Apple (NASDAQ:AAPL), Google (NASDAQ:GOOGL), and Nokia (NYSE:NOK), Kevin calculates the return on research capital, or RORC. You can calculate this number yourself by taking this year's gross profit and dividing it by last year's R&D expenditures.
After charting the RORC against each stocks' price change over the past few years, it becomes apparent that greater R&D expenditures may increase the stock's price return. However, there is one huge caveat. To learn more about the RORC and how to better think about your company's R&D investments, watch the video below.
Fool contributor Kevin Chen owns shares of Baidu. You can follow him on Twitter at @TMFKang or on Google+. The Motley Fool recommends Apple, Baidu, and Google. The Motley Fool owns shares of Apple, Baidu, Google, and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.