Economic profitability: how to understand ROI to make better investment decisions

What does company profitability mean?

When we talk about economic profitability, also known by its acronym ROI (Return on Investments), we refer to the return generated by investing in a particular company. It sounds simple, but in practice, it has more layers than it appears.

A company’s profitability is always calculated considering historical results, that is, past performance. Based on that analysis, we extrapolate a trend that helps us project our future investment: as much as we put in, as much we expect to get out.

Knowing this indicator greatly facilitates decision-making. In principle, every investor seeks companies that provide higher economic profitability, although it is not a guarantee of success. The market life has taught us fascinating cases: almost all startups that are now giants spent years with negative ROI, generating losses for their initial investors.

Key difference: economic profitability vs. financial profitability

Many people confuse these two terms, but the difference is fundamental:

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

Depending on the company’s structure, these numbers can be quite different.

How to calculate a company’s profitability

The calculation is straightforward and does not require complexity:

ROI = (Earnings / Invested Capital) × 100

This formula works whether you are an individual investor buying shares or a company evaluating the profitability of its internal projects.

Practical example 1: Investment in individual stocks

We have €10,000 to invest in two different stocks (A and B), €5,000 in each.

At the end of the period:

• Stock A: we have €5,960 (gain: €960)
• Stock B: we have €4,876 (loss: €124)

ROI stock A = (960 / 5,000) × 100 = 19.20%

ROI stock B = (-124 / 5,000) × 100 = -2.48%

Clearly, stock A is more interesting for this period.

Practical example 2: Business projects

A company invests €60,000 in remodeling its stores. After appraisal, those locations are now worth €120,000.

ROI = (60,000 / 60,000) × 100 = 100%

The investment doubled its value. Excellent result.

The most instructive cases: when ROI is misleading

Amazon: from losses to empire

Amazon experienced several consecutive years with negative ROI. Investors were losing money. But anyone who had maintained their investment from those red years until today would have obtained enormous returns. Patience was generously rewarded.

Tesla: the ROI of -201.37% that turned into wealth

Between 2010 and 2013, Tesla recorded an ROI of -201.37% in some quarters. Any conventional investor would have fled. But those who kept their capital from December 2010 until today achieved a return of +15,316%, an authentic fortune.

These cases illustrate why ROI is especially misleading in Growth companies, which allocate massive resources to R&D and future development.

When ROI works well

ROI is a golden indicator when you want to evaluate Value companies, that is, those with a long stock market history, predictable results, and a clear projection. In these cases, a consistently high ROI signals good business management.

Apple is the perfect contemporary example: its ROI exceeds 70%, reflecting its exceptional ability to monetize investments thanks to margins provided by its brand and technology.

What is the real use of knowing a company’s profitability?

On a personal level, ROI is your tool to compare options: if option A gives you 7% and B gives you 9%, you will choose B (all else being equal).

At the investor level in listed companies, you look for businesses that know how to monetize their resources. There are countless examples where poor capital allocation destroyed business results. That’s why tracking ROI over time is crucial, not just the isolated figure of this quarter.

Especially important: when investing in companies whose foundation is innovation and intensive investment, ROI is an indicator you should monitor regularly, but never interpret in isolation.

Advantages of ROI as a metric

• Simple to calculate and effective
• Takes into account the total investment made
• Data is relatively easy to find
• Comparable across different types of assets
• Valid for both individual investors and company valuation

Limitations of ROI

• Based on historical data, projecting the future is difficult
• Can be misleading in growth companies that invest aggressively today to gain tomorrow
• Companies investing little resources can artificially inflate their numbers

Conclusion: ROI as part of a broader analysis

Economic profitability is an important factor, but it should never be your only criterion. A high ROI guarantees nothing, just as a low ROI can be a hidden opportunity or a company in danger.

The smart approach is to evaluate the company from multiple angles: ROI, P/E ratio, margins, cash flow, competitive position, sector in which it operates.

Remember: ROI can distort your analysis in sectors focused on present investment for future profitability—biotech, artificial intelligence, etc.—compared to more mature sectors like energy or food distribution.

Using all these indicators together, without being hypnotized by just one, is the foundation of solid investment decisions.