Master ROI: How to Calculate and Maximize Your Investment Returns

▶ Economic profitability: the indicator every investor must master

In the world of investing, there is an indicator that separates strategists from novices: ROI or Return on Investments, more commonly known in Spanish as economic profitability. It is a fundamental metric that determines how much money we are earning or losing when investing our capital in a specific asset.

Economic profitability represents the return we get from our investments over a certain period. Although the concept sounds simple, its correct interpretation is crucial for making sound financial decisions. Those operating in equities should consider economic profitability with the same seriousness as other ratios like PER or EPS.

Through in-depth ROI analysis, we not only evaluate numbers in a spreadsheet but also uncover the quality of business management that, sooner or later, will impact the price movements we seek to capture.

▶ Understanding economic profitability: beyond the numbers

When we talk about economic profitability, we refer to a company’s ability to generate profits from its investments. But here’s the important detail: we always work with historical data, with the past. This information allows us to project future trends following a simple logic: “the more I invest, the more I expect to obtain.”

Economic profitability provides context for our investment decisions. In theory, a rational investor would choose companies with higher ROI. However, the market’s history teaches us valuable lessons: many of the companies that are giants today experienced years of negative economic profitability.

Consider Amazon’s case. During several fiscal years, this e-commerce giant reported negative ROI while aggressively investing in infrastructure and technology. Those who understood the context and endured the storm achieved extraordinary returns.

Similarly, Tesla went through a brutal period between 2010 and 2013 with devastating economic returns: in December 2010, it showed an ROI of -201.37%. Any ruthless investor would have sold in panic. However, those who held their position until today have experienced gains exceeding 15,316%.

This phenomenon illustrates a critical principle: economic profitability is especially revealing in value companies with a solid track record, but it can be misleading in growth companies where R&D investment exceeds current profits.

▶ Economic profitability versus financial profitability: understanding the difference

Many investors confuse these two concepts. Although “economy” and “finance” seem synonymous, their applications are different. The main difference lies in their calculation basis:

• Economic profitability: calculated on the total assets of the company
• Financial profitability: calculated on the own funds

This distinction can produce very different results depending on each company’s debt structure. A highly leveraged company will show a significant gap between the two metrics.

▶ Formula: how to calculate economic profitability

Calculating ROI is surprisingly straightforward. It requires no specialized software or complex formulas:

ROI = (Earnings / Actual Investment) × 100

This equation allows us to precisely quantify how much money we have earned or lost on a specific investment. The interesting part is that ROI works both at the individual level (as a private investor) and at the corporate level.

If you buy shares of a company at €10 and sell them at €15, you have generated an ROI. Similarly, if a company invests €1 million in a production plant and generates €500,000 in annual profits, that is also its ROI.

▶ Practical cases: applying ROI in reality

Example 1: Investment in equities

We have €10,000 to invest in two different stocks. We allocate €5,000 to each:

Stock A: invest €5,000, get €5,960

• ROI = (960 / 5,000) × 100 = 19.20%

Stock B: invest €5,000, get €4,876

• ROI = (-124 / 5,000) × 100 = -2.48%

The conclusion is clear: Asset A offers significantly higher economic profitability, making it the more attractive option initially.

Example 2: Business investment

A company performs a renovation of its physical locations investing €60,000. After the upgrade, assets are valued at €120,000:

ROI = (60,000 / 60,000) × 100 = 100%

The investment doubled its value, demonstrating efficiency in capital allocation.

▶ Why does economic profitability matter?

Economic profitability serves different functions depending on our role:

At a personal level: it allows us to compare investment options objectively. If we have two alternatives with returns of 7% and 9%, respectively, the decision is obvious.

At an investor level: it identifies companies that optimize their resources effectively. Many companies fail not due to lack of potential but because of poor capital allocation. ROI exposes these inefficiencies.

In value strategies: it is fundamental. We are betting on mature companies with predictable histories and clear projections.

In growth strategies: it becomes less relevant. Innovative companies will invest aggressively in development, temporarily generating low or negative economic profitability.

Apple exemplifies the opposite extreme: reporting an ROI above 70%, positioning itself among the best investment managers thanks to margins protected by brand and technology.

▶ Strengths of economic profitability

• Simplicity: it is extraordinarily easy to calculate
• Universality: applies to any type of investment or company
• Availability: the necessary data is accessible
• Comparability: allows contrasting assets of different natures
• Duality: works both for individual investors and for corporate analysis

▶ Limitations to consider

• Historical bias: based on past data, making reliable predictions difficult
• Sector dependence: growth companies may show negative ROI without implying failure
• Manipulability: companies minimizing investments can artificially inflate their profitability
• Ignored context: does not distinguish between strategic investments and operational expenses

▶ Conclusion: economic profitability in perspective

Economic profitability is an essential component of your investment analysis, but it should never be the only decision factor. It works best when combined with a comprehensive evaluation of the company: its competitive position, business model, sector, and maturity stage.

A low economic profitability can be an opportunity if it comes from a growth company in expansion phase. Similarly, a high ROI in a stagnant sector may mask future risks.

The true art of investing lies in understanding when to trust economic profitability and when to see it as just one piece of the puzzle. Companies with solid economic profitability in stable sectors deserve attention, but remember that some of the greatest historical returns come from companies that seemed like failures based on their initial ROI.