ROI: The metric every investor should understand (but doesn't always do)

Why did Tesla lose money and still turn out to be the best investment?

Imagine you had invested capital in Tesla in 2010. The numbers were disastrous: -201.37% economic return. Any decent analyst would have recommended you to run away. However, those who stayed saw their investment multiply by 153 times.

This is the central dilemma that explains why ROI (Return on Investments) is crucial for investors, but it cannot be the only compass. Economic profitability tells us a story, but it’s not always the full story.

What is economic profitability really?

Economic profitability measures the return you get from investing your capital in one company instead of another. It sounds simple: “I invest this much, I get that much.” But here’s the trick: it’s always calculated looking backward, based on historical results.

What makes this indicator special:

• Reflects how well a company manages its total resources
• Applies to both your personal investment and any corporate one
• Clearly differentiates between companies that generate value and those that only spend

How it’s calculated and what that number means

The formula is straightforward: net profit divided by total investment. That’s it.

But look at real examples:

Case 1: You invest €10,000 in two stocks

• Asset A: Invest €5,000, recover €5,960 = ROI of 19.20%
• Asset B: Invest €5,000, recover €4,876 = ROI of -2.48%

The difference is obvious: Asset A is superior.

Case 2: A company remodels stores

• Investment: €60,000
• Resulting value: €120,000
• ROI: exactly 100%

Why Amazon and Apple tell different stories

Amazon spent years with negative ROI. Investors lost money on paper. But the company’s strategy was clear: reinvest aggressively in growth. The results came later, and they were transformative.

Apple presents the opposite scenario: its current ROI exceeds 70%. This reflects a company that maximizes value through brand margins and technology. It didn’t need years of losses because its model was efficient from the start.

The lesson: ROI is absolutely valid for “value” companies with a long stock market history. For growth companies (growth), it’s almost misleading to look only at this number.

Economic profitability vs. financial profitability: They are not the same

Many people confuse them. The fundamental difference:

• Economic profitability: Looks at the performance over all total assets
• Financial profitability: Only considers equity

Depending on a company’s debt level, you’ll see completely different results with each metric.

What is ROI really useful for?

As an individual investor: You compare options. If option A gives you 7% and B gives you 9% over the same horizon, B is better. It’s a pure evaluation of your investment result.

As a business analyst: You look for organizations that know how to generate returns on capital. Poor resource allocation destroys results, regardless of revenue. ROI exposes that.

But here’s the critical warning: you should look at the historical trajectory of ROI, not just the current number. Profitability is not immediate.

The strengths of ROI that make it indispensable

◾ Extremely simple to calculate, with no ambiguities
◾ Incorporates all invested capital in the calculation
◾ Data is available and verifiable
◾ Works by comparing assets of completely different natures
◾ Valid for both your personal portfolio and corporate analysis

The risks every investor must recognize

◾ It relies entirely on historical data; projecting into the future is speculation
◾ It can harm innovative companies that invest today for profitability tomorrow (biotech, AI, etc.)
◾ Companies with low investments can easily manipulate their numbers
◾ A single ROI reading can be extremely simplistic

Context is everything

The biggest mistake is using ROI as the sole indicator. A low ratio doesn’t mean imminent failure; a high ratio doesn’t guarantee future success.

When analyzing a company to invest, ROI should be one piece of a broader analysis. You need to understand:

• What type of company you’re looking at (value vs. growth)
• Its sector of operation (investment-intensive vs. cash-flow generating)
• Its competitive positioning

An energy supply company with an ROI of 15% tells a different story than an AI startup with negative ROI. Context is not a detail; it’s the difference between a brilliant investment and a costly mistake.

So yes: look for companies with solid ROI. But don’t forget to look beyond that single number.