Research and development (R&D) is the process of systematic investigation into and experimentation with new and innovative ideas in order to improve existing products or create new ones. This process can involve studying potential markets, designing new products or services, developing prototypes, and running tests to see how well they perform. In order to be successful, businesses must constantly invest in new and innovative products, and R&D is a key part of this process.
When you're doing financial modelling, you need to be aware of a company's research and development (R&D) spending. R&D spending is important because it can be a sign of a company's future prospects. A company that is investing in R&D is likely to be doing so because it expects to see future growth, and thus its share price may be worth investing in. By contrast, a company that is not investing in R&D may be seen as having a more uncertain future, and its share price may be less desirable.
In order to model R&D spending, you need to know how much a company is spending on it, and where that money is being spent. R&D spending can be broken down into three categories: basic research, applied research, and development. Basic research is the most speculative, and is focused on exploring new ideas and theories. Applied research is the next step, and is focused on turning those theories into practical applications. Development is the final stage, and is focused on bringing those applications to market.
It's important to understand the difference between R&D spending and capital expenditures (CAPEX). CAPEX is the money a company spends on things like new factories, equipment, and property. R&D spending is not the same as CAPEX, and should not be included in calculations of a company's total CAPEX spending.
When modelling a company's R&D spending, it's important to remember that the spending may not be ongoing. A company may invest in a big project one year, but not spend anything on R&D the next year. As a result, it's important to track R&D spending over time, rather than looking at it as a static number.