Economic Profitability: The Indicator Every Investor Must Master

Do You Really Know What Your Investments’ Profitability Is?

When you decide to put money into a publicly traded company, there is a fundamental question that no one answers clearly: how much money will you actually earn? That is exactly the essence of economic profitability, more commonly known by its English abbreviation ROI (Return on Investments).

It’s not a complicated concept, but it has profound implications on how we evaluate companies and, consequently, how we build our portfolios. ROI acts like a mirror: it shows you the return a company gets from its total investments, which is critical information for deciding where to allocate your capital.

Economic Profitability: More Than Just a Number

We talk about economic profitability when measuring the performance generated by a company’s total equity. Unlike what many think, what is profitability is not simply “profit divided by investment.” It’s an indicator that captures how efficiently a company uses all its assets to generate earnings.

But here’s the important detail: this metric always looks backward. It’s calculated based on historical results, not future promises. That means an excellent ROI in 2023 does not guarantee success in 2024, although it does give us valuable clues.

When ROI Is Deceptive: Lessons from Tesla and Amazon

The most revealing examples come from the companies that dominate the market today. Take Tesla: between 2010 and 2013, this company had an ROI of -201.37%. Any rational investor would have fled. However, those who kept their capital until today accumulated gains of +15,316%.

Amazon spent years with negative economic profitability while building its logistics empire. The market punished these negative results, but investing in infrastructure eventually generated extraordinary margins.

This teaches us a crucial lesson: ROI is a powerful indicator for established companies with predictable business models, but it is completely misleading for companies in aggressive growth phases. A startup that invests everything in R&D+I typically shows negative ROI for years before taking off.

How to Calculate Economic Profitability

The calculation is straightforward:

ROI = (Net Profit / Total Investment) × 100

Suppose you invest €10,000 in two stocks. After the period:

• Stock A: €5,000 invested, you recover €5,960 = ROI of 19.20%
• Stock B: €5,000 invested, you recover €4,876 = ROI of -2.48%

For a company that invests €60,000 in remodeling stores and increases its equity value to €120,000: ROI = 100% (the investment doubled)

The method is the same whether you are an individual investor or analyzing a corporation.

ROI vs. Financial Profitability: The Key Difference

Many get confused here. Financial profitability only considers equity, while economic profitability includes all total assets. This means that a company with a lot of external financing (debt) can show a modest ROI but an excellent financial profitability. Understanding this difference is crucial to avoid misinterpreting the numbers.

What ROI Is Really Useful For

In individual decisions, it’s obvious: if option A gives you 7% and option B gives you 9%, you choose B. But at the corporate level, it’s more sophisticated.

ROI helps you identify how efficiently a company manages its resources. Poor capital allocation can destroy operating margins for years. Apple, for example, reports an ROI over 70%, reflecting its almost unique ability to convert investment into value thanks to brand factor and technology.

When building a value investing strategy (traditional stocks with a history), ROI is fundamental. When looking for growth plays in sectors like biotech or AI, you need to be wary of ROI because these companies invest today to profit tomorrow.

Advantages and Limitations

The Good:

• Simple and effective calculation
• Comparable across different sectors
• Works for both individual investors and corporate analysis
• Data is publicly available

The Problematic:

• Based solely on historical data
• Completely distorts growth company analysis
• A company with low investments can artificially inflate its ROI
• Does not capture management quality beyond the numbers

Conclusion: Use ROI, But Be Smart

Economic profitability is a powerful tool, but it’s only one piece of the puzzle. Don’t make the mistake of choosing stocks solely based on ROI. A company with a low P/E may be bankrupt or a bargain; a negative ROI may indicate imminent failure or a generational investment.

The right approach is to analyze the company holistically: sector, business type, growth phase, competition. ROI is the indicator that tells you “how well this company manages money today,” but your decision should include “how well it can manage money tomorrow.”