Price-To-Innovation-Adjusted Earnings

It sounds like something out of those documentaries Disney makes about Epcot: “Our Imagineers are working tirelessly to bring you the best tomorrow...today!”

But the Price-To-Innovation-Adjusted Earnings isn’t a stat born out of Figment the Dragon’s Wall Street fever dream. It’s a way of calculating the relationship between the company's earnings power and/or its investment in development, as compared to its stock price.

Start with a company's earnings per share. That's the bottom line figure from most earnings statements issued by public companies. Then calculate the firm's R&D per share. Companies often provide a research and development line item in their financial statements. Divide this by the number of shares the company has outstanding (also provided in the financial documents) to get the R&D per share figure.

Once you have the sum of the EPS and R&D per share numbers, divide the company's stock price by that combined total. That equation will give you the price-to-innovation-adjusted earnings.

A drug development company, CureItAll Inc., had EPS of $0.65 per share last quarter. Meanwhile, it had $150 million in R&D expenses, and has 200 million shares outstanding. That equates to R&D per share of $0.75 ($150 million divided by 200 million). Calculate $0.75 + $0.65, which equals $1.40. The stock is trading at $9 a share. Divide $9 by $1.40...the ratio equals 6.43.