Peter Drucker noted that innovation is one of the only two drivers of business (the other is marketing), yet innovation-driven efforts often get swept into obscurity in an effort to meet the demands of the moment.

To better understand the value of innovation, take a look at one of Wall Street’s most coveted metrics: the Price-to-Earnings Ratio (or P/E Ratio or just “the multiple”).

A publicly-traded company’s P/E ratio is calculated by dividing the stock price (market value per share) by earning per share (EPS). For example, Apple’s current stock price is $168 and its EPS is $5.72 yielding a P/E ratio of 29.41. 

The P/E ratio shows how much investors are willing to pay per dollar of earnings. With a multiple of 29.41 investors are willing to pay $29.41 for every $1 of Apple’s earnings.

Higher multiples imply a higher expectation of future growth. While Apple’s multiple is 29.41, multiples for Dell, Microsoft, and Hewlett-Packard all hover around 15. This means that the market expects Apple to grow twice as fast as its competitors.

Apple, Amazon.com, Google and Netflix all have staggeringly high P/E ratios as a consequence of their customer-centric, innovation-driven businesses. Their higher multiples increase the perceived value of their business today, providing them with a larger pool of capital to continue to fuel innovation efforts tomorrow.

Notice also how these innovation-driven businesses dominate within their respective markets.

It pays to be innovative.

Related posts:

1. The Secret Behind Innovation
2. Incremental Innovation
3. Is Your Business Killing Creativity?