Profitability: The Metric That Separates Winners from Losers in the Stock Market

Why Is Understanding Economic Profitability Important?

When you decide to put your money into a stock, you’re asking a fundamental question: what return will I get? The answer lies in an indicator that professionals know as ROI (Return on Investments), or what in Spanish we call economic profitability. It is one of the most relevant ratios for company evaluations, alongside PER and EPS, but many investors still do not know how to leverage it correctly.

Profitability reflects the performance generated by a company when investing its resources. From the individual investor’s perspective, it measures how much money you gain (or lose) by allocating capital to a specific asset. But here lies the key: higher returns do not always guarantee success.

The Hidden Complexity in Numbers

When analyzing economic profitability, we work with historical data. This is an important limitation: we look backward to project forward. The question we should ask is: if I invested X, will I achieve similar results in the future?

Major technology companies offer valuable lessons. Amazon experienced consecutive years with negative ROI. Investors at that time saw their money evaporate. Any “traditional” analyst would have recommended to run away. However, those who maintained their position later witnessed an extraordinary transformation that turned that investment into one of the best decades in the stock market.

Tesla illustrates this even more dramatically. At the end of 2010, it had an ROI of -201.37%. The profitability was catastrophic from any angle. But those who had faith and kept their capital until today achieved an accumulated gain of +15,316%. A fortune in terms of return.

How to Calculate Profitability: The Simple Formula

The calculation is straightforward. You don’t need to be a mathematician:

ROI = (Profit Obtained / Investment Made) × 100

This allows you to quantify exactly how much you gained or lost relative to what you invested. It is a ratio applicable both at a personal level and for analyzing listed companies.

Let’s imagine two practical scenarios:

Case 1 - Individual Investment: You have €10,000 to invest in two stocks. You split €5,000 into each. Months later, one totals €5,960 and the other €4,876.

• Stock A: (5,960 - 5,000) / 5,000 × 100 = 19.20% profitability
• Stock B: (4,876 - 5,000) / 5,000 × 100 = -2.48% profitability

The decision is obvious: A generated a positive return while B lost capital.

Case 2 - Company: A corporation invests €60,000 in remodeling stores. Subsequent valuation: €120,000.

• ROI = (120,000 - 60,000) / 60,000 × 100 = 100% profitability

The investment doubled in value.

Economic Profitability vs. Financial Profitability: They Are Not the Same

Many confuse these terms. The difference is substantial:

Financial profitability is calculated solely on equity. Economic profitability considers total assets. Depending on your target company’s capital structure, both metrics can yield very different results. This detail is critical when evaluating companies with different financial leverage.

What Is This Data Really Useful For?

At an investor level, profitability shows you if a company knows how to make money with its money. Some companies waste resources on failed projects while others generate extraordinary margins.

Apple has a ROI above 70%, positioning it among the most efficient companies in profitability. Brand power and proprietary technology create margins few companies reach. This information should weigh heavily in your analysis.

However, profitability is especially misleading in Growth or biotech companies. Here, companies investing heavily in R&D today show negative ROI, but it is precisely that investment that creates tomorrow’s giants. Context is everything.

The Advantages and Limits of Relying on This Ratio

What Works:

• Simple calculation, clear interpretation
• Considers the entire investment
• Comparable across different asset types
• Valid for both individual investors and corporate analysis

What Fails:

• Fully dependent on past data; projecting future is speculative
• Distorts analysis of innovative companies
• Companies minimizing investment may appear artificially profitable
• Does not capture transformation potential

The Conclusion: Don’t Seek the Silver Bullet

Economic profitability is a valuable tool, but not a universal truth. Seeing a low ROI does not mean imminent failure. Seeing a high ROI does not guarantee safety.

The smart approach is to integrate this ratio into a comprehensive analysis: sector type, economic cycle, management quality, competitive positioning. Compare Apple (services and premium ecosystem) with a food distributor (with naturally compressed margins). Context is law.

When looking for investment opportunities, balance numbers like ROI with business narrative. The best gains always come from understanding not only where the money is today but where it will be tomorrow.