Price-to-Innovation-Adjusted Earnings Ratio
What is the Price-to-Innovation-Adjusted Earnings Ratio?
How Does the Price-to-Innovation-Adjusted Earnings Ratio Work?
The formula for price-to-innovation-adjusted earnings is:
Price-to-Innovation-Adjusted Earnings = Price per share / (+ R&D per share)
For example, let's assume that Company XYZ, a company that designs and manufactures medical devices, earned $10,000,000 in profits last year. One of its big expenses was R&D, on which it spent $8,000,000 last year. Company XYZ's 11,000,000 outstanding shares currently trade at $5 per share.
Using this information, we can calculate that Company XYZ's earnings per share (EPS) equals $10,000,000 / 11,000,000 = $0.91. We can also determine that Company XYZ spent $8,000,000 / 11,000,000 = $0.73 per share on R&D.
Using the formula above, we can therefore calculate that Company XYZ's price-to-innovation-adjusted earnings is:
$5 / ($0.91+$0.73) = 3.05
Why Does the Price-to-Innovation-Adjusted Earnings Ratio Matter?
Unlike the P/E ratio, the price-to-innovation-adjusted earnings ratio gives investors an idea of how well companies perform absent the expense of innovation. By adding back R&D expenses, the ratio removes the pressures and effects (some would even say penalties) of having to expense R&D costs for which a company may have little to show now but might reap huge benefits from later. In turn, the price-to-innovation-adjusted earnings ratio allows investors and analysts to identify more easily companies that are investing in innovation.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.