A method of measuring the company’s stock price with respect to its earnings after adjusting for its innovation i.e. Research and Development expenditure.
Formula: It is computed by adding R&D Expense back to earnings and then calculating the P/E ratio for that company.
= (Price per share) / (Earnings per share + R&D per share)
For example, Company ABC spent 1000000$ on R&D.
Let us assume that market price of share is 100$ and EPS is .8$ and profits being 2500000$
Means outstanding shares are :
Now R&D per share is .32$
so Price-To-Innovation-Adjusted Earnings=100$/(.8+.32)=89.28