X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Lessons from Philip Fisher - V - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jul 12, 2010

    Lessons from Philip Fisher - V

    There are many elements in the field of analysing stocks that cannot be answered by mathematical formulae. Sure, ratios can be calculated for the various components of business performance. And they usually are. However, each company's case is usually different in some or the other way. Numbers may very well be important. But understanding the stories behind the numbers is equally, if not more, important.

    Nothing exemplifies this better than Philip Fisher's insights into how to analyse the research and development (R&D) strength of a company. The R&D division is very important to the kind of company we seek for investment. For if a company is to continue to grow its sales at a fast clip over 10 - 20 years, intensive R&D efforts will lay the foundation for this. In this article, we present Fisher's insights on how to gauge a company's R&D strength.

    It's always quite easy to calculate the R&D expenses of a company as a percentage of its sales. This figure for a particular company is then often compared to that of its peers. Numerous other comparisons are also usually drawn. Like that with the industry average, with other individual companies, with historical trends etc. All with the intention of gauging the level of each company's research effort. But is this a useful method of doing so?

    Like we mentioned earlier, there are no generic answers that apply across the board. It depends on each situation and each individual company. This is because R&D expenses cover a wide gamut of activities, the treatment of which may be different for different companies. Some managements may consider a particular expense as R&D expense, others as part of manufacturing expenses. Thus it is Fisher's contention that if all companies were to report R&D expenses on a comparable accounting basis, R&D expense ratios may actually look very different.

    R&D expenses have another unique feature that must be kept in mind. The amount of ultimate benefits companies derive out of their R&D differs widely among companies. For each rupee spent on research, one well run company may very well get twice as much benefit than the another. This happens especially in the case of companies that are much better at managing and coordinating their research departments than others. Thus just comparing the research expenditure of various companies on a blanket basis may sometimes be of very limited usefulness.

    Some examples may drive the point home -

    • A company may have a very good collection of highly skilled scientists, experts and labs. But it may lack good leaders who can effectively coordinate the work of such technical personnel towards a common goal. Thus a company which has such sound leadership will have a one-up over the other one, even if its researchers are of a relatively lower stature.

    • Coordination between the research division, and manufacturing & sales personnel is also an area where many companies flounder. If this is a weak link, then the company runs the risk of finally coming up with products that may not be manufactured in the most cost effective way. Or they may lack the sales appeal needed for them to be a success in the market.

    • The attitude of top management can also have a huge influence on the final profitability of the research activities of a company. Specific R&D projects that have lavish budgets in the company's good years cannot be suddenly and drastically cut during a bad year. This takes away from the effectiveness of the research project. Many managements are not sensitive to this fact. And they end up escalating the total costs of a project.
    So how does a careful investor go about arriving at a conclusion about the efficacy of a company's R&D activities?

    There are two ways.
    • The scuttlebutt. A surprisingly complete picture about company's research activities can emerge if intelligent questions about the above mentioned points are asked by an investor. These questions can be asked to a diversified group of research people. Some from within the company. Some who belong to the company's competitors. People from academics, government agencies and other independent research firms who deal in the same field should also be approached.

    • There is also another simpler but useful method that Philip Fisher suggests. That is to find out how much of a particular year's revenues and profits have been due to the results of company's R&D efforts over a long duration of time prior to that year. Ten years is a good benchmark. A company which has produced a good flow of profitable new products over a long period can be counted on to continue such a performance. Provided its methods and management remain the same that is.
    And in that manner, an investor can look to truly understanding a company's R&D abilities.

    Philip Fisher Series- Previous article | Next article | All Articles

     

     

    Equitymaster requests your view! Post a comment on "Lessons from Philip Fisher - V". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Mughal Money: How a 14th Century Emperor Proves Gresham's Law (The 5 Minute Wrapup)

    Aug 24, 2017

    How a fourteenth century Mughal story holds one of the key essences of safe stock investing.

    5 Attributes Of Lord Ganesha You Can Apply To Your Personal Finance (Outside View)

    Aug 24, 2017

    With Lord Ganesha's attributes and teachings, awaken your inner-self and inculcate these financial habits for a sound future.

    Why Shopping Online This Festive Season Makes Better Sense (Outside View)

    Aug 24, 2017

    Online shopping if done sensibly can help you save money and carries many other advantages.

    Mr Trump Has Been Broken (Vivek Kaul's Diary)

    Aug 24, 2017

    Kelly, Mattis, McMaster, Cohn, and Mnuchin are in charge. But these Pentagon bureaucrats and Wall Street hustlers may be worse than a loose-cannon president.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 24, 2017 03:36 PM

    MARKET STATS