Research and development spending as a percentage of revenue. The ideal range depends on industry: tech companies often spend 15-25%. Too little may mean underinvestment in the future; too much may burden profitability.
Formula
Description
Measures the company's investment in innovation relative to its revenue. Adequate R&D spending is essential for maintaining competitive position in technology and pharmaceutical industries. Too little may indicate underinvestment in the future, while too much may burden near-term profitability.
Interpretation
The ideal range of 5-15% depends heavily on industry. Tech companies often spend 15-25%. Under 3% in a tech company may signal underinvestment. Above 25% may indicate the company has not yet found a scalable business model.
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Overhead costs (selling, general, and administrative expenses) as a percentage of revenue. Below 30% is generally efficient. Buffett notes that companies with consistently low SGA ratios tend to have durable competitive advantages.
Total operating expenses divided by revenue. Below 0.8 indicates a healthy 20%+ operating margin. Above 1.0 means the company isn't covering operating costs with revenue. A declining ratio signals improving efficiency.
Total revenue divided by employee headcount. Measures workforce productivity and business scalability. Technology companies with platform models tend to lead. Above $300,000 is generally strong.
How quickly a company pays its suppliers. Lower turnover conserves cash. Very low turnover may strain supplier relationships. Compare to receivables turnover for a complete working capital picture.
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