| Another way for investors to manage financial affairs, besides fixed deposits, is to put their money in the stock market. The stability and improvement of capital market not only boost the economy of a nation or region but also make it possible for the firms to rise money with lower cost, while the common investors can take their yield.In this article, with the indexes, which are used in earning quality analysis, we first assess the earning character of Taiwan listed corporations as a whole by analyzing their financial statements. Then find what can the P/E ratio, obtained by calculating the historical earning or expected earning, do for making decision in investment. By analyzing the earning character and P/E ratio, we make the better choice of stocks. At last, adjust the acceptable P/E ratio according to the earning character in order to see if the firms with good earning character can have higher P/E ratio, conversely, lower P/E ratio.Then we come to conclusions: (1) In the bull market, the firms with best earning character can have highest P/E ratio, then follow the ordinary firms, while the firms with worst earning character is on the floor, which means the earning character is related to the yield of stocks. (2) The P/E ratio from estimated earning is more reasonable and precise than that from historical earning, which means the current earning has strong relevance with current stock price. (3) No matter which index is used, the earning character, the P/E ratio from estimated or historical earning, the one that has the highest yield is that with good earning character and less that 20 P/E ratio. Note that no matter what earning character the firm has, you should sell the stock when its P/E ratio rises up to 20. (4) After we lower their P/E ratio, the firms with bad earning character can gain excess yield in bull market, and it can reduce loss in bear market. Investor can earn excess yield from these firms only when the P/E ratio is lower than that of industry.
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