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

BREAKING DOWN '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. Forward Price To Earnings - Forward ...

    Forward price to earnings (forward P/E) is a measure of the price-to-earnings ...
  2. Research And Development (R&D) ...

    Any expenses associated with the research and development of ...
  3. Price/Earnings To Growth - PEG ...

    Price/Earnings to Growth (PEG) is a stock's price to earnings ...
  4. Return On Research Capital - RORC

    Return On Research Capital is a measure to assess the revenue ...
  5. P/E 30 Ratio

    P/E 30 ratio means that a company's stock price is trading at ...
  6. Accounting Ratio

    Accounting ratios, also known as financial ratios, are used to ...
Related Articles
  1. Investing

    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

    Key Financial Ratios for Pharmaceutical Companies

    Because of the unique requirements for bringing products to market, pharmaceutical industry stocks are best analyzed by using certain key financial ratios.
  3. Investing

    How Do I Calculate the Price-Earnings Ratio?

    If Apple is trading at $108.73 per share, and its trailing twelve months' EPS is $6.45, calculate the P/E ratio as...
  4. Insights

    And The King of R&D Spending Is

    When it comes to investing in other countries, knowing how much is being spent on research and development, and where it's be spent, is important for any investor.
  5. Investing

    Key Financial Ratios to Analyze Biotech Companies (AMGN, GILD)

    Explore the rapidly growing biotechnology industry, and learn some of the key financial ratios investors use to analyze companies in the industry.
  6. Investing

    R&D Spending And Profitability: What's The Link?

    Return on research capital (RORC), can help investors measure how much profit R&D spending actually generates.
  7. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  8. Investing

    Beware False Signals From the P/E Ratio

    The P/E ratio is a simple tool for evaluating a company, but it can also send false signals.
  9. Investing

    Are stocks with low P/E ratios always better?

    Is a stock with a lower P/E ratio always a better investment than a stock with a higher one? The short answer is no. The long answer is it depends.
RELATED FAQS
  1. How do companies benefit from price discrimination?

    Learn what the average price-to-earnings ratio is for the insurance sector and why the average price-to-earnings ratio should ... Read Answer >>
  2. How can the price-to-earnings (P/E) ratio mislead investors?

    A low P/E ratio doesn't automatically mean a stock is undervalued, just like a high P/E ratio doesn't necessarily mean it ... Read Answer >>
  3. What are the benefits of R&D (research and development)?

    Learn about the many benefits of research and development (R&D) efforts for companies in competitive markets, including the ... Read Answer >>
  4. What is the average price-to-earnings ratio in the oil & gas drilling sector?

    Investing in the energy sector provides an opportunity for value investors, but it is necessary to understand metrics such ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center