Practical Guide: How to Master the Economic Return Formula for Your Investments

▶ Understanding ROI: The Indicator Every Investor Must Master

In the world of stock market investing, there is an indicator that transcends market trends and remains a fundamental tool for evaluating capital decisions: ROI (Return on Investments), or what we know as economic profitability. This financial ratio allows us to compare how effectively a company (or ourselves as investors) leverage our resources to generate profits.

The fundamental question that economic profitability answers is simple but powerful: how many units of benefit do I obtain for each unit I invest? Although it may seem like a basic question, its answer has profound implications for company valuation and, consequently, for the price of their shares.

For those operating in the stock market, understanding ROI is as relevant as mastering indicators like PER or EPS. It is not just another ratio; it is a filter that reveals the quality of business management and anticipates future movements in share prices.

▶ The Economic Profitability Formula: Simplified Calculation Method

The economic profitability formula does not require complex algorithms. Its calculation is summarized in a straightforward operation:

ROI = (Earnings Obtained / Investment Made) × 100

This simplicity is, paradoxically, one of its greatest strengths. Whether you are a private investor or analyzing the financial statements of a multinational corporation, the calculation remains the same.

Imagine you make an investment in stocks of 5,000 euros and after a period, you obtain 5,960 euros. Your individual ROI would be 19.20%. Similarly, if a company invests 60,000 euros in renovating its facilities and subsequent valuation assesses these assets at 120,000 euros, its project ROI reaches 100%.

The key point is that these numbers, seemingly simple, contain all the necessary information to make strategic decisions.

▶ Historical Data: Why the Past Matters Less Than You Think

Here lies a critical limitation: economic profitability always operates on past data. It extrapolates historical performance to project future results. This method works magnificently with traditional and established companies but fails spectacularly with growth businesses.

Let’s consider two contrasting examples. Amazon, for several consecutive quarters, reported negative ROI. Investors reacting solely to this indicator would have abandoned the position, missing out on an accumulated return that later turned out to be extraordinary.

Tesla presents an even more dramatic case. Between December 2010 and December 2013, its ROI fluctuated between -6.70% and -201.37%. Any analysis based solely on the economic profitability formula would have labeled this investment as a sure disaster. Those who maintained capital in this company from 2010 until now experienced a gain of +15,316%.

Apple, on the other hand, operationalizes economic profitability masterfully, showing an ROI that exceeds 70%, revealing how its brand and technology ecosystem maximize every dollar invested.

▶ Differentiating: Economic Profitability Versus Financial Profitability

These two concepts are often confused. The distinction lies in the basis of calculation: while financial profitability focuses on the company’s equity, economic profitability considers total operating assets. Depending on each company’s capital structure, this difference can generate significantly different results in analysis.

▶ Practical Applications: When and How to Use ROI

In Value Investing strategies, where traditional companies with long stock market histories and predictable results are sought, the economic profitability formula provides reliable guidance. However, in Growth strategies, where rapidly expanding companies that reinvest heavily in R&D are prioritized, ROI can be misleading.

Analyzing the trajectory of ROI over time is more useful than focusing on a single period. A company that gradually improves its indicator from -50% to +30% reveals a fundamental change in its operations, while erratic fluctuations suggest business volatility.

▶ Advantages of Economic Profitability in Your Analysis

This indicator offers multiple benefits for investors:

• Easy calculation without the need for sophisticated tools
• Incorporates all investments made in its analysis
• Data accessibility through standard information sources
• Comparability between assets of completely different natures
• Valid for both individual self-assessment and corporate valuation

▶ Limitations to Consider

However, ROI has important restrictions:

• Based on historical data that do not guarantee future performance
• Ineffective for evaluating growth companies prioritizing expansion over immediate profitability
• Susceptible to manipulation: corporations with low investments can artificially inflate their ratios
• Incapable of capturing qualitative factors such as disruptive innovation or intangible competitive advantages

▶ Summary: Integrating ROI into Your Investment Strategy

Economic profitability is an essential but not definitive component of your fundamental analysis. Companies from different sectors require different interpretations of this ratio. A biotech laboratory investing aggressively today expecting results tomorrow will naturally show a depressed ROI, while a food distributor shows immediate margins.

True investing mastery lies in contextualizing the economic profitability formula within a comprehensive evaluation of each company. Distinguishing between a low ROI due to strategic growth versus poor management separates a competent investor from an amateur. Applying multiple ratios, studying sector trends, and understanding the business model turn ROI from a simple number into a strategic compass for your portfolio.