Price-To-Innovation-Adjusted Earnings

AAA

DEFINITION of 'Price-To-Innovation-Adjusted Earnings'

A variation of the price-to-earnings ratio (P/E ratio) that takes a company's level of spending on research and development (R&D) into account. It is calculated by adding any expenditure on R&D back to earnings and then calculating the P/E ratio for that company.

Price-To-Innovation-Adjusted Earnings

INVESTOPEDIA EXPLAINS 'Price-To-Innovation-Adjusted Earnings'

This calculation is extremely useful when evaluating company performance in industries such as software development, pharmaceuticals and computers. Companies in these industries are pressured by the need to innovate. However, accounting principles hurt these companies by forcing them to deduct R&D spending from earnings. Heavy expenditures on R&D shows that a company is willing to take risks to further its growth. This calculation allows an investor to identify these innovative companies.

RELATED TERMS
  1. Diffusion Of Innovations Theory

    A hypothesis outlining how new technological and other advancements ...
  2. Research And Development - R&D

    Investigative activities that a business chooses to conduct with ...
  3. Price/Earnings To Growth - PEG ...

    A stock's price-to-earnings ratio divided by the growth rate ...
  4. Price-Earnings Ratio - P/E Ratio

    A valuation ratio of a company's current share price compared ...
  5. Growth Company

    Any firm whose business generates significant positive cash flows ...
  6. Growth Investing

    A strategy whereby an investor seeks out stocks with what they ...
Related Articles
  1. Buying Into Corporate Research & Development ...
    Markets

    Buying Into Corporate Research & Development ...

  2. The Ins and Outs Of In-Process R&D Expenses
    Investing

    The Ins and Outs Of In-Process R&D Expenses

  3. Which leverage ratios are most useful ...
    Fundamental Analysis

    Which leverage ratios are most useful ...

  4. What is the difference between cash ...
    Fundamental Analysis

    What is the difference between cash ...

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center