Pick Stocks With Only Two Numbers: The Complete Guide to P/E Ratio and ROE

You spent NT $300 K o na s t oc k an d a y e a r l a t er i t^{'} so n l y N T$ 200K — it’s not bad luck, you were reading the wrong numbers from the start.

Many people pick stocks like this: open the phone, glance at the price, feel this one’s cheap, that one’s too expensive, then close the app; or hear a friend say a stock is hot recently, rush in, and get trapped. Heart racing as the price rises, stomach churning as it falls — but you never know what you’re actually buying.

This is the biggest blind spot for Taiwan retail investors: you keep watching the price, but the price itself tells you nothing. A NT $50 s t oc k c anb e 10 t im es m or ee x p e n s i v e t hana N T$ 500 stock — this isn’t a riddle, it’s real. How many years have you been fooled by the price number? You count.

Stock price is the market’s emotion; value is the company’s fact — long-term profit comes from buying the right facts, not guessing the right emotions.

First底层 rule: P/E ratio decides whether you buy expensive or cheap

According to Taiwan’s standard financial education and academic definitions of stock valuation, to evaluate whether a company’s stock is worth investing, the core indicators are P/E ratio (PER) and Return on Equity (ROE) — these two numbers are the core criteria for judging whether a stock is expensive and whether the company is profitable, not the stock price itself.

Standard definition of P/E ratio: stock market price divided by earnings per share. In plain language, it’s how many years of company profits it takes to recoup the price you pay now at the current price. A P/E of 15 means the price you pay theoretically takes 15 years of profits to recoup; a P/E of 30 takes 30 years.

A stock priced at NT $50 w i t h N T$ 1 EPS has a P/E of 50; a stock priced at NT $500 w i t h N T$ 50 EPS has a P/E of only 10. Which is more expensive? Obviously the NT$50 one. Do you get it now? How many years did the price number fool you?

The Taiwan Weighted Index’s average P/E ratio has long been around 15–20x. If you buy a stock at a P/E far above this range (e.g., above 40x or 50x), you need to be very clear about what you’re buying — because the premium you pay must be supported by future hyper-growth, and the risk is correspondingly higher.

The true meaning of P/E ratio

The P/E trap: low P/E doesn’t necessarily mean cheap

Many people see a low P/E and think it’s cheap, then rush in, but a low P/E has two causes: the market is undervaluing the company, or the company’s earnings are collapsing. If it’s the latter, what you bought is a value trap — the more it falls, the cheaper it looks, but in reality it’s getting more expensive.

So P/E must be paired with ROE — which leads us to the second key number.

Second key number: ROE decides the company’s profit efficiency

Standard definition of ROE (Return on Equity): net income after tax divided by shareholder equity. In plain language, it’s what proportion of profit the company earns in a year using shareholders’ money. An ROE of 20% means that for every NT $100 o f s ha r e h o l d er c a p i t a l y o u p u t in, t h eco m p an y e a r n s N T$ 20 back for you in a year — high ROE means the company is more efficient at making money with capital.

In Buffett’s stock-picking logic, ROE is one of the core indicators; academic research also long supports that high-ROE firms outperform the market on long-term stock returns. Taiwan-based research, including papers from National Chengchi University’s Department of Finance, has similar findings.

A reasonable Taiwan ROE standard: generally Taiwan companies that maintain ROE above 15% over the long term are relatively high-quality; those consistently above 20% are even rarer. You can open the TWSE’s Market Observation Post System (MOPS, mops.tse.com.tw) and look up any listed company’s ROE data directly — completely free, no fees required.

The true meaning of ROE

Many people know to look at ROE, but they only look at a single year’s ROE without looking at the trend. A company with 20% ROE this year, but whose ROE has fallen from 30% to 20% over three consecutive years, sends a more important signal than the ROE number itself.

The ROE trend is the real early-warning system — you need to look at the ROE direction over 3–5 consecutive years, not a single-year snapshot. This data is fully available on MOPS’s financial ratio analysis page, but most people have never clicked in.

Third底层 rule: The marketing logic of financial institutions

When Taiwan’s brokers, banks, and investment trusts recommend stocks, the most common pitch is: “this one is strong recently, this theme is taking off, foreign capital is buying, the main force’s chips are concentrated” — they almost never tell you the P/E, the ROE, or whether the company’s profitability is rising or falling.

Why? Because trading volume is the broker’s revenue source — the more you trade, the more fees they collect. If they told you “find a company with long-term high ROE and reasonable P/E, then hold long-term without frequent trading”, their revenue would drop. This isn’t conspiracy theory; it’s the inevitable result of the business model.

SITCA’s regulations also explicitly require members to disclose risk when recommending products, but in actual marketing materials, risk is often in the smallest font and the last paragraph. You are the one responsible for your own money, not them.

Three scenarios: wrong, right, and the 20-year gap

Scenario 1 (wrong approach): In 2018, you chased a hot Taiwan tech stock with NT $300 K a t a P / E ab o v e 45 x an d R O E o n l y 8$ 300K became NT $150 K . * * I n f a c tt h eco m p an y^{'} s R O E ha d a l r e a d y s t a r t e dd ec l inin g in 2019 * *; i f y o u^{'} d l oo k e d a tt ha t n u mb er y o u s h o u l d n^{'} t ha v e b o ug h t a tt ha tp r i ce . I n 2022 y o u f ina l l y co u l d n^{'} tt ak e i t an d e x i t e d a t a l oss, pl u sr o u n d - t r i p f ees an d sec u r i t i es t r an s a c t i o n t a x, * * a c t u a l l osse x cee d e d N T$ 160K, NT $300 K b ec am e l ess t han N T$ 140K, taking four years**.

Scenario 2 (right approach): Same NT $300 K, y o u p i c k a T ai w anm o a t co m p an y, * * P / E ina r e a so nab l e 15-20 x r an g e, R O E ab o v e 20$ 300K drops to NT $210 K — * * t hi s i sr e a l r i s k t ha t c a n^{'} t b e a v o i d e d * * . B u t b ec a u se t h eco m p an y^{'} s p r o f i t abi l i t y d i d n^{'} t co l l a p se an d R O E h e l d, * * t h e p r i cer eco v er e df u l l y b y 2021 an d co n t in u e d mak in g n e w hi g h s; b y 2023 t h es am e N T$ 300K grew to about NT$600K–700K** (depending on the specific target).

Scenario 3 (20-year long-term gap and extreme black swans): The two worst crashes in Taiwan stock market history — the 2000 dot-com bubble saw the weighted index fall from 10,000 to around 3,000, a drop of over 70%, taking nearly 15 years to recover; the 2008 financial crisis saw about a 60% drop with 3–4 years to recover. If you’d bought a basket of high-P/E low-ROE dot-com stocks at the 2000 high with NT$300K, many targets were ultimately delisted, and your money might never come back. But if you’d bought traditional-sector leaders or financial stocks with reasonable P/E and stable ROE, although they also crashed hard, because corporate profitability didn’t collapse, they ultimately all recovered and later made new highs.

This is the real value of the two numbers — they can’t keep you out of market drops, but they can keep you out of permanent value destruction. Market drops are temporary; corporate competitiveness collapse is permanent. What you should fear isn’t the price dropping, but your having bought a company whose earning power is disappearing.

Wrong vs right stock picking: the 5-year gap

4 iron rules

Money put into the stock market must be idle funds not needed for 3+ years. The longest recovery cycle in Taiwan stock market history exceeds 10 years; if you bought a quality company but the market crashed, you must be able to hold through the low.
The target’s ROE must stay above 10% for 3+ consecutive years with no sustained downward trend. A single year of high ROE doesn’t count; you need sustainable profitability. If a company’s ROE drops from 20% to 15% to 10%, even though it’s still at 10%, the trend is already a warning.
No single stock should exceed 30% of your equity portfolio. Even if you found a company with super-high ROE and reasonable P/E, a single firm can still face unpredictable black swans (management scandals, structural industry collapse, geopolitical shocks). Diversification isn’t because you don’t trust the company; it’s because you know the limits of your own understanding.
Regular review — at least every 6 months reconfirm the ROE and P/E of your holdings. Corporate competitiveness isn’t permanent; many once-excellent Taiwan companies saw their ROE drop significantly over 5–10 years, and their stock prices underperformed the market over the long term. You’re not buying and walking away; you’re buying and continuing to monitor whether the company’s earning power is sustained.

4 action steps

Step 1: Check the ROE trend of your current holdings. Open the TWSE Market Observation Post System (mops.tse.com.tw), enter your held or interesting stock code in the search box, click into the financial ratio analysis and find the ROE column, look at the 5-year numbers and trend — this action takes 5 minutes, but it tells you more than a month of technical lines.

Step 2: Look up P/E and compare. Check the stock’s P/E on MOPS or Taiwan financial websites (such as Stock Information Net, MoneyDJ), compare with the Taiwan Weighted Index’s average P/E to judge whether the stock is relatively expensive or cheap. Remember P/E must be paired with ROE — a low P/E alone doesn’t mean cheap, you must confirm ROE supports the valuation.

Step 3: Build your screening list. Use these three conditions as a first-pass filter — ROE above 15% for 3+ consecutive years, P/E not exceeding 1.5x the Taiwan Weighted Index average, and the most recent quarter’s EPS not in major decline. The number of Taiwan listed companies meeting these three conditions is small, but these are the targets worth your deeper research time. If you’re a beginner and don’t want to screen yourself, you can start by tracking broad-market ETFs like Yuanta Taiwan 50, then gradually add individual stocks once you have the basics.

Step 4: Build a regular review mechanism. Set a reminder in your phone calendar every 6 months to re-check the ROE and P/E of your holdings. If ROE has dropped more than 3 percentage points for two consecutive periods, or P/E has far exceeded the historical reasonable range, reassess whether to continue holding. This isn’t telling you to trade frequently, but to monitor fundamentals with discipline. Stop-loss triggers should be fundamental changes in corporate profitability, not short-term price swings.

4-step action flow

2 Taiwan-specific advanced pitfalls

Pitfall 1: cross-shareholding and investment contributions distorting ROE. Taiwan has many conglomerate enterprises; the parent’s ROE may look great, but a careful look at financials shows a large share of profit comes from subsidiaries or investment contributions — non-operating income — not from core business competitiveness. This is especially common in Taiwan traditional-sector conglomerates. Per FSC financial disclosure rules, listed companies must disclose consolidated financials, but many retail investors only look at the parent company’s individual financials — develop the habit of looking at consolidated ROE, while comparing the core operating margin to confirm ROE comes from sustained core competitiveness, not one-off non-operating gains or asset sales.

Pitfall 2: treasury stock operations affecting P/E. When a company buys back a large amount of its own stock as treasury stock, shares outstanding drop, EPS mechanically rises, P/E looks lower, as if it became cheaper — but this doesn’t mean the company’s profitability really improved, just the denominator shrank. Several Taiwan tech companies in recent years have heavily bought back treasury stock, making P/E numbers look attractive, but if you look at absolute total profit there hasn’t been meaningful growth. MOPS has complete treasury stock execution records — when evaluating P/E, confirm whether the company is heavily buying back, and whether the buyback funding source is operating cash flow or debt.

Five-question decision framework

Before considering buying a Taiwan stock, ask yourself:

What is the company’s ROE for the past 3+ consecutive years? Is the trend rising or falling?
Is the current P/E reasonable, elevated, or depressed relative to the Taiwan broad-market average? What is the reason behind this?
Does the company’s ROE come from sustained core competitiveness, or one-off non-operating gains or treasury stock operations?
If this stock drops 30% tomorrow, does my capital situation allow me to continue holding?
Do I know enough about this company to judge whether its intrinsic value has fundamentally changed during market panic?

If you can clearly answer all five, then you should buy — if you can’t answer any one of them, don’t move yet, do the homework first.

Differentiated strategies by demographic

Students / fresh graduates: Priority is building emergency reserve (3–6 months of living expenses); before that, do not invest large amounts in individual stocks. Start with monthly DCA into a Taiwan 50-related ETF, while learning how to read financial statements, ROE, and P/E; once you have the basics, gradually add individual stock research.

Office workers with families / small savers: Only after emergency reserve, insurance, and mortgage are arranged should idle funds go into stocks. Individual stock allocation should be decided based on family finances and risk tolerance, not the more the better. The same P/E and ROE screening applies, but you need a more conservative diversification.

Middle-aged group (10–20 years to retirement): Portfolio should start considering asset allocation balance, not all concentrated in high-volatility individual stocks. Quality-company individual stocks can be part of the portfolio but need to be balanced with fixed-income assets. Specific proportions depend on your retirement plan; consult a Taiwan-licensed financial advisor.

Pre-retirees: Capital preservation and stable cash flow matter more than capital growth. High-ROE growth individual stocks may have volatility beyond your tolerance — this group is better served by defensive targets with stable dividends and sound financials, while keeping enough cash for living needs.

Stock picking isn’t about guessing who will rise, it’s about finding companies that even if you guess wrong on short-term moves, won’t let you regret it over the long term.

All content in this video is for financial education purposes only and does not constitute investment advice or any recommendation for any specific stock or financial product. All investing carries risk; past performance does not guarantee future results. Please evaluate your personal financial situation and risk tolerance before making any investment decision, and consult Taiwan-licensed financial advisors and tax professionals. FSC investor protection information is available on the FSC official website.

Disclaimer: This article shares investment and financial concepts and information, and does not constitute any specific investment, tax, or legal advice. Markets carry risk; invest with caution and make independent judgments based on your own risk tolerance, consulting professional advisors as needed.