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. Price-Earnings Ratio - P/E Ratio

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

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

    A strategy whereby an investor seeks out stocks with what they ...
  5. Stock And Warrant Off-Balance Sheet ...

    A financing option developed to help biotechnology companies ...
  6. Return On Innovation Investment

    A performance measure used to evaluate the effectiveness of a ...
Related Articles
  1. Markets

    Buying Into Corporate Research & Development (R&D)

    Investors take note: companies that cut research and development are in danger of saving today but losing big tomorrow.
  2. Investing

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

    Are these charge-offs fair accounting or earnings manipulation? Learn more here.
  3. Fundamental Analysis

    What is the difference between a capital gearing ratio and a net gearing ratio?

    Understand the definition of gearing in the finance industry, the difference between net gearing and capital gearing ratios and how they are interpreted.
  4. Investing Basics

    What is the difference between the gearing ratio and the debt-to-equity ratio?

    Dive deeper into gearing ratios: what are they, how are they used and why the debt to equity ratio is one of the most popular analytical gearing tools.
  5. Fundamental Analysis

    What is the difference between interest coverage ratio and DSCR?

    Understand the basics of the interest coverage ratio and the debt-service coverage ratio, including calculations and how each type reflects financial stability.
  6. Investing Basics

    What is the difference between interest coverage ratio and TIE?

    Read about the times interest earned, also known as the interest coverage ratio. Find out why this is an important ratio for investors and creditors.
  7. Investing Basics

    What is accrual accounting used for in finance?

    Read about the accrual method of accounting, its uses and rules, and why it is considered so important for investors, lenders and managers.
  8. Investing Basics

    What is the difference between accrual accounting and cash accounting?

    Understand the differences between the two basic methods of accounting commonly used by businesses: cash accounting and accrual accounting.
  9. Investing Basics

    When are expenses and revenues counted in accrual accounting?

    Take an in-depth look at the treatment of revenues and expenses within the accrual method of accounting and learn why many consider it superior to cash accounting.
  10. Fundamental Analysis

    When does a business report gross margins?

    Learn how gross margins are calculated and when publicly traded companies release these figures. Explore consensus street estimates.

You May Also Like

Hot Definitions
  1. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  2. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  3. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  4. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  5. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center