Decoding Economic Profitability: Your Compass for Smart Investment Decisions

Why Your ROI Determines the Success or Failure of Your Portfolio

Imagine you have €10,000 ready to invest. How do you decide where to put it? This is where a fundamental concept that many investors overlook comes into play: economic profitability, known in the jargon as ROI (Return on Investments).

This indicator is not just another number on the spreadsheet. It is, literally, the measure of how much money you are (making) or (losing) with each euro you invest in a company. It sounds simple, but mastering this ratio can be the difference between multiplying your capital or watching it evaporate.

ROI: From Theory to Practice

Economic profitability answers a brutal and direct question: How much return do I get on my investment? To calculate it, you only need two numbers: the profit you have generated and the initial investment. The formula is as elegant as it is powerful:

ROI = (Net Profit / Total Investment) × 100

So simple. An ROI of 20% means that for every €100 invested, you earned €20 in profit. But here’s the important part: ROI always looks backward. It is calculated based on historical results, allowing you to identify trends and project future decisions.

The Traps of ROI: Lessons from Tech Giants

If you only looked at the ROI from a decade ago, you would have made colossal mistakes. Take Tesla as an example. Between 2010 and 2013, this company showed an ROI of -201.37%. Yes, you read that right: less than 200%. Any conservative investor would have sold everything immediately, fearing imminent bankruptcy.

However, those who held their investment until today experienced a return of +15,316%. A fortune literally extracted from years of “apparent failure.”

The same happened with Amazon. For years, financial statements showed losses, negative ROI, and experts predicted its collapse. Today, it is the largest e-commerce platform in the world, and its early investors are multimillionaires.

This reveals an uncomfortable truth: ROI is a distorting lens when applied to (growth companies). These firms deliberately sacrifice current profitability to dominate future markets. They invest massively in research, development, and infrastructure. Their ROI may be negative, but their opportunities are exponential.

Economic Profitability vs. Financial Profitability: They Are Not the Same

Many stumble here. Although they seem synonymous, these two concepts are different:

• Economic profitability: Measures the performance of ALL assets of a company
• Financial profitability: Measures only the performance of shareholders’ equity

The distinction matters. A company can have assets generating value, but if the debt structure is terrible, the financial profitability will be disappointing. It’s like having a valuable car but being in debt up to your ears.

Clarifying Examples: Real Calculations

Scenario 1: You as an Individual Investor

You invest €5,000 in stock A. After a year, that investment is worth €5,960. Your ROI is:

ROI = (960 / 5,000) × 100 = 19.2%

At the same time, you invest another €5,000 in stock B, which drops to €4,876. Your ROI is:

ROI = (-124 / 5,000) × 100 = -2.48%

The conclusion is obvious: stock A made you money; stock B took it away.

Scenario 2: A Company Invests in Its Infrastructure

A store invests €60,000 in remodeling. Post-renovation, those premises are valued at €120,000. Its project ROI is:

ROI = (60,000 / 60,000) × 100 = 100%

The investment doubled. That’s a clear operational success.

When Does ROI Really Matter?

Economic profitability is especially valuable when pursuing a Value investment strategy: you look for established companies with long histories, predictable results, and clear trajectories. Here, ROI is your ally.

But it also says a lot about the quality of management. A company that knows how to maximize its assets demonstrates managerial competence. Apple, for example, boasts an ROI over 70%, placing it among the best capital maximizers in the market. Why? Its huge margins and capacity for innovation turn every euro invested into multiplied returns.

The Strengths of ROI

• Operational simplicity: Easy to calculate and compare across investments
• Universality: Works for evaluating stocks, real estate, and more
• Concentrated information: One number summarizes capital efficiency
• Accessibility: Data is publicly available for listed companies

The Weaknesses You Cannot Ignore

• Retrospective bias: Only looks at the past, does not predict the future
• Blindness to Growth: Distorts the evaluation of innovative companies
• Manipulability: Companies with low investment expenses can appear more profitable artificially
• Lack of context: Does not distinguish between sustainable and casual returns

The Verdict: ROI, But Not Only

Economic profitability is a critical component of your analysis arsenal, but it should never be your only compass. An excellent ROI can indicate a genuine opportunity or a declining company living off the past. A low ROI could be a value trap or a diamond waiting to be polished for explosion.

Invest globally. Examine the type of company ¿is it biotech or energy supply?, its competitive position, long-term ROI trends, and how this ratio interacts with other financial indicators. Only then will you turn economic profitability into a truly powerful tool for your investment strategy.