ROI: The Indicator That Separates Winners from Losers in the Stock Market

Why Do Professional Investors Live by ROI?

Every day, thousands of investors face the same question: which of these two companies will leave me more money in my pocket? The answer isn’t always in the stock price or brand reputation. It’s in economic profitability, that number that few understand but everyone should master.

ROI (Return on Investments) is basically what you get for every euro you invest. Sounds simple, right? But here comes the tricky part: this indicator reveals not only if a company is profitable today but if it knows how to manage its resources well to be profitable tomorrow.

Cases That Disprove the Logic of Negative ROI

When you see a company with negative ROI, your first instinct will be to run. But wait. Look at what happened with Tesla between 2010 and 2013.

For more than three consecutive years, Tesla’s ROI was catastrophic: it reached -201.37% in December 2010. Any investor with common sense would have pulled out immediately. However, those who dared to keep their capital in that company until today would have harvested a return of +15,316%. A small fortune.

The same happened with Amazon. Years of operating with negative ROI. Shareholders lost money on paper while the company rebuilt its operations. Today, it is the global e-commerce giant.

The lesson is clear: economic profitability tells the story of the past but does not predict the future. Especially when investing in growth companies that prioritize innovation over immediate profits.

Economic Profitability vs. Financial Profitability: Here’s the Trick

Many investors confuse these two terms. It’s understandable, but making this mistake can be costly.

Economic profitability evaluates how much return a company generates using ALL its assets (debt + equity). Financial profitability only looks at equity. A company can have excellent financial profitability but poor economic profitability if it is over-indebted. Or vice versa.

The nuance matters. When analyzing a company, make sure you know which one you’re looking at.

The Formula Traders Use Every Morning

Calculating ROI is ridiculously easy:

ROI = (Net Profit / Total Investment) × 100

Example 1: You invest €5,000 in stock A and sell it for €5,960.

• Profit = €960
• ROI = (960 / 5,000) × 100 = 19.20%

Example 2: You invest €5,000 in stock B and sell it for €4,876.

• Loss = -€124
• ROI = (-124 / 5,000) × 100 = -2.48%

Automatic decision: stock A yields much more. But wait, what if you know that B is a biotech company with a promising pipeline? That’s where your judgment comes in.

Example 3 (business): A store remodels for €60,000 and its value rises to €120,000.

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

The investment doubled. That’s the result CFOs aim for.

When ROI Deceives You (And How to Avoid It)

Here’s the dirty secret: ROI only looks backward. It uses historical data. And markets, as you know, don’t move backward.

In value investing (established companies), ROI is your best friend. Traditional companies with a long track record, predictable results. Here, ROI gives you security.

In growth investing (high-growth companies), ROI is your enemy. Companies like Apple show ROI over 70%, making them investment machines. But AI or biotech startups can have negative ROI for years while building the future. Judging them by this indicator is blindness.

Companies that allocate little resources to R&D can artificially inflate their ROI. That doesn’t mean they are good investments. It only means they are not betting on tomorrow.

The Weapons and Armor of ROI

What works:

• Simple, transparent calculation, no tricks.
• Works equally for comparing your own portfolio or evaluating listed companies.
• Provides a universal metric: you can compare any asset against any other.
• Easy to obtain data if you invest in regulated markets.

What fails:

• Condemned to the past. It predicts nothing.
• Useless for sectors where today’s investment bears fruit in five years.
• Defensive companies may seem geniuses with high ROI but no real growth.
• A low ratio doesn’t always mean failure. Sometimes it means the company is rebuilding.

The Smart Move: ROI + Context

ROI should never travel alone. It’s like a plane without radar.

When analyzing a company, ask yourself:

• What type of company is it? (Growth or maturity?)
• What is the trend of ROI over the last 5 years? (Improving or worsening?)
• How does its ROI compare to competitors?
• What sector is it? (Biotech vs. energy = completely different expectations?)

An energy supply company should have stable, high ROI. That’s expected. An AI startup can have negative ROI and still be a golden investment. Context is king.

Why Winners Never Ignore ROI

Economic and financial profitability are the foundation of any serious investment decision. But they are not the only foundation.

When you see two options and ceteris paribus one offers 7% and the other 9%, go for the second. That’s obvious. What separates winning investors is that they don’t blindly trust that number. They use it as a starting point, not a final destination.

Apple, with ROI over 70%, not only has good numbers. It has an impressive business model, margins protected by brand and technology, and proven capacity to monetize every euro invested. That’s what you should look for.

The conclusion is brutal: ignore ROI and you’ll be blind. Obsess only over ROI and you’ll fail with companies that later will triple. The truth lies in balance: use this indicator as a compass, but don’t trust it blindly. Check the trend, understand the sector, and be especially skeptical of numbers that seem too good to be true.