Economic Profitability: Calculation, Application, and Limits in Your Investment Strategy

Why Does Economic Profitability Matter in Your Investment Analysis?

When you decide to invest in a listed company, you need to evaluate not only its share price but also how that company creates value with its resources. This is where economic profitability, also known as ROI (Return on Investments or Return on Investment), comes into play.

This financial indicator measures the performance a company achieves from each euro invested in its assets. For equity investors, understanding ROI is as crucial as knowing the PER or EPS, as it reveals the quality of management and the company’s capacity to generate sustainable profits.

Defining Economic Profitability: Beyond the Simple Formula

Economic profitability answers a fundamental question: how much money does a company generate with its total available resources? It is calculated by dividing the profit obtained by the investment made, expressed as a percentage.

Although it sounds simple, there is an important detail: it is always calculated based on historical data. This means we look backward to project forward, with the logic that “the more you invest, the more you get.”

The challenge lies in correctly interpreting these numbers. A low or negative ROI does not always indicate failure, especially in growing companies that reinvest their earnings into innovation and development.

The Amazon Case: Patience Versus Negative Profitability

Amazon is the perfect example to understand why you should not obsess over short-term ROI. For several consecutive years, this e-commerce giant recorded negative ROI, meaning its investors were on paper losing money.

However, those who kept their capital in the company during those uncertain years were later rewarded with extraordinary returns. The lesson: a low economic profitability today can be a sign of ambitious investment in infrastructure and growth capacity.

Tesla and the Risk of Exiting Too Early

Even more dramatic was Tesla’s case between 2010 and 2013. In December 2010, the company showed an ROI of -201.37%, a figure that would have scared off any conservative investor. By 2013, it still had negative returns oscillating between -6.70% and -63.47%.

But here comes the surprise: an investor who had stayed with Tesla from December 2010 until today would have seen their investment multiply by more than 15,316%. Patience with high-growth companies can change your financial life.

How to Calculate Your Economic Profitability: Step by Step

The formula is straightforward:

ROI = (Profit obtained / Investment made) × 100

Let’s look at two practical scenarios:

Case 1: Individual Investor with Two Stocks

Suppose you invest €10,000, distributing €5,000 in stock A and €5,000 in stock B. After a period:

• Stock A: you get €5,960 → ROI = +19.20%
• Stock B: you get €4,876 → ROI = -2.48%

Stock A clearly offers better economic profitability, although this does not guarantee future performance.

Case 2: Business Project

A company invests €60,000 in remodeling its stores. A subsequent appraisal values those locations at €120,000.

ROI = (€60,000 / €60,000) × 100 = 100%

The investment has doubled in value.

Critical Difference: Economic Profitability vs. Financial Profitability

Many confuse these terms. The key is in this:

• Economic profitability: Measures return on the company’s total assets
• Financial profitability: Measures return on equity (net worth)

Although it seems like a minor distinction, it produces very different results depending on the company’s financing structure.

Practical Applications of Economic Profitability

For Individual Investors

If you have two investment options and one offers 7% profitability while the other offers 9%, the decision is obvious. ROI allows you to compare assets on equal footing, regardless of their nature.

For Analyzing Listed Companies

When looking for companies for your portfolio, you should observe the ROI trajectory, not just an isolated period. Apple, for example, reports an ROI above 70%, positioning it among the companies that best monetize their investments thanks to their brand margins and technological capacity.

This is particularly useful in Value (value) strategies, where you seek established companies with a predictable history and reliable projections.

Important Limitations of Economic Profitability

Advantages of ROI:

• Simple and direct calculation
• Considers total investment volume
• Easy-to-find data
• Comparable across different asset types
• Valid for both individual investors and companies

Disadvantages of ROI:

• Entirely based on historical data, limiting future projections
• Can be misleading in high-growth companies prioritizing R+D+I over current profits
• Companies minimizing investment can artificially inflate their ROI
• Does not reflect risk or investment volatility

The Business Context Makes a Difference

A 5% ROI in an energy or food distribution company is very different from a 5% ROI in a biotech or artificial intelligence startup. The former seek stability and consistent returns; the latter sacrifice current profits for future positioning.

Therefore, economic profitability cannot be your sole decision criterion. It should be complemented by:

• Sector analysis
• Business model evaluation
• Market trends
• Competitive positioning of the company

Conclusion: ROI as a Tool, Not a Final Answer

Economic profitability is a valuable indicator that helps you assess how efficiently a company uses its resources. However, it is only one piece of the puzzle.

A low ratio may indicate imminent crisis or strategic investment in growth. A high ratio may reflect operational strength or simply conservative investing. True investing skill lies in contextualizing these numbers within the company’s and sector’s overall vision.

Combine ROI with other ratios like PER or deeper fundamental analysis. Study the indicator’s temporal trajectory. Understand whether you are facing a company with immediate profitability or deferred profitability. Only then can you make truly informed investment decisions.