How to Find Great Investments: Cheap P/E + High ROIC
Most investors stop at one question: “Is the stock cheap?”
But cheap alone isn’t enough. A weak business is still weak, no matter how low the price.
The key is combining valuation (P/E ratio) with quality (ROIC). Let’s break it down.
1. The Cheap Shop (Low P/E, Low ROIC)
Imagine Marcos opens a cookie shop.
Investment: €400,000
Profit in year one: €10,000
Return on invested capital (ROIC): 2.5%
Because the profits are so small, the market values his shop cheaply. His shares trade at just P/E = 5.
At first glance, it looks like a bargain. But in reality, it’s a bad business — every euro invested produces very little return.
2. The Great Shop (High ROIC, High P/E)
Now look at Laura’s cookie shop:
Investment: €400,000
Profit in year one: €200,000
ROIC: 50%
The market sees her efficiency and rewards her. Her shares trade at P/E = 20.
This is a great business, but it looks expensive. Paying too much upfront can shrink future returns.
3. The Sweet Spot (Low P/E + High ROIC)
Here’s the investor’s dream:
A company like Laura’s (50% ROIC), but temporarily ignored by the market, trading at P/E = 5.
This is the sweet spot:
Cheap valuation (low P/E) → you’re not overpaying.
High efficiency (high ROIC) → the company compounds capital effectively.
When both conditions align, you’re looking at an outstanding opportunity.
4. Why This Matters
Low P/E alone can trap you in weak businesses.
High ROIC alone can tempt you into overpaying.
Cheap + High ROIC gives you the best of both worlds: quality at a discount.
This combination is rare, but when you find it, you tilt the odds massively in your favor.
Final Takeaway
Great investing isn’t about finding what’s cheap.
It’s about finding what’s good and cheap.
👉 The golden rule: Invest in companies with high ROIC, but only when they trade at a low P/E.
That’s where long-term wealth is built.