I just reviewed something that many traders ignore: truly understanding how ROE works can change your way of analyzing assets, both in stocks and in crypto.

Look, most people look for the next pump without asking what's behind it. But if you want to invest in real value, you need to spot companies that actually generate profits with the capital they have. That’s exactly what ROE measures: how well a company turns what you invest in it into real profits.

The formula is simple. Take the annual net profit, divide it by shareholders’ equity, and multiply by 100. That’s it. But here’s the interesting part: a high ROE doesn’t always mean what you think. I’ve seen companies with skyrocketing ROE that later collapsed. Why? Because they took on excessive debt, made strategic share buybacks, or had one-time gains that never repeated.

When comparing two companies in the stock market, ROE helps you know which one uses its capital better. Imagine Microsoft with a 42% ROE versus META with 14.9% a while ago. It might seem that Microsoft is a better investment, right? But if you don’t look at the sector average, you miss the context. In digital entertainment, that 42% could be below average, while META’s 14.9% might be above its sector.

This also applies to cryptocurrencies, though with nuances. With Bitcoin, Ethereum, or altcoins, ROI works differently. Calculating it is more straightforward: buy at USD 5,000, sell at USD 20,000, and your ROI is 3.0 (300%). But here’s the secret: ROI doesn’t tell you everything. It doesn’t consider commissions, the time you waited, volatility, or liquidity risks.

That’s why I always complement the analysis. I look at a company’s historical ROE, see how it evolved over recent years, identify if the increase was due to better management or just leverage. Same with cryptos: a high ROI is nice, but if it came from a short-term speculative move, it doesn’t mean the asset has solid fundamentals.

One thing I learned: when you see an abnormally high ROE, investigate. It could be negative net income with negative equity (deceptively high), years of previous losses with one year of artificial profit, or simply too much debt. Leverage is a double-edged sword. It works when you earn more with borrowed money than it costs, but it destroys you when the numbers turn against you.

To optimize your portfolio, you need to know if your investments generate the returns you expect. If your ROI in crypto is positive, good. If it’s negative, it’s time to ask whether that asset deserves to stay in your portfolio or if it’s better to redirect that capital. Cash flow is crucial: understanding what your portfolio generates allows you to identify when you have liquidity for the next operation.

In summary, ROE in stocks and ROI in crypto assets are complementary metrics, not independent. Use them together, look beyond the absolute numbers, and always check the historical context. That’s what separates traders who last from those who burn out quickly.