Cash Flow In A Business Is The Same As Profit Wall Street Just Doesn’t Understand Innovation

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Wall Street Just Doesn’t Understand Innovation

Over the past 30 years, companies that have been able to innovate effectively and make good use of their research and development (R&D) budgets have become desirable but undervalued by the market. While the market can be quick to jump on the latest craze and push some vaunted stocks to new heights, companies that innovate effectively aren’t always recognized until after they happen. Most of the time, Wall Street tends to misvalue companies on innovation because it is relatively difficult to quantify. Because innovation is not something that can be universally measured in the same way that profits, revenue, and cash flow can be, most investors shy away from analyzing innovation.

Innovation is often the most valuable asset a company has when it pays off, according to Apple over the past 15 years, but without proper quantification, this value is rarely considered. Investors are concerned about the prospect of R&D being uncertain, but analysts have found that they can predict value by using results over the past five years as a relative guide. In companies with large R&D resources, which are generally considered more innovative, the past is a very good predictor of their future success. Often, these companies with a proven track record of innovation over the past few years will outperform their competitors by more than 7 percent per quarter. This means big profits that come from an innovative approach.

While Wall Street may be hesitant to make decisions based on these studies, there is no doubt that the innovation process can be a differentiating factor among competitors. Increasing spending on research and development without tightening the innovation process may be one of the reasons why many companies do not perform well in the area of ​​innovation. Innovation can also be volatile, as even top companies can have a year or two of poor R&D results, but most companies that focus on process and continually increase their innovation spending see financial gains ahead of Wall Street.

Whether you’re looking to increase your company’s spending on innovation or tighten up the innovation process, you can get great metrics on Wall Street that try to quantify innovation. By providing data they can use to analyze businesses more effectively, you can adapt that same information to your business to measure the success of your process and improve results. Most companies will benefit from these metrics as much or even more than Wall Street if they are willing to use them.

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