Recently, I started reviewing how most investors evaluate their decisions, and I realize that many ignore a indicator that should be basic: ROI, or what we know as economic profitability. It’s curious because this ratio is probably one of the simplest to understand, but at the same time one of the most misinterpreted in the market.

Economic profitability is quite straightforward: it measures how much money you earn (or lose) relative to what you invested. If you put in 1,000 euros and take out 1,200, your ROI is 20%. Sounds easy, right? The issue is that most people only look at the number without understanding what’s behind it.

What’s interesting is that this indicator works both for us as individual investors and for analyzing entire companies. If I buy a stock at 10 euros and sell it at 15, I have a 50% ROI. But when Inditex invests millions in new stores and that generates profits, that’s also ROI. It’s the same concept in two different contexts.

Now, here’s what few understand: economic profitability is based on historical data. That’s why it’s useful for established companies, but it can be misleading with startups or growth companies. Look at Amazon’s case: between 2000 and 2010, it had negative ROI. Investors were losing money. But those who held on saw how it turned into a money-making machine. The same happened with Tesla. Between 2010 and 2013, its ROI was -201%. Yes, minus 201%. Anyone would have run away. But those who stayed gained over 15,000%.

This shows you why you can’t rely solely on this number. If you’re looking for value-type companies, with a long history on the stock market, then economic profitability is pure gold. It allows you to compare apples to apples. But if you’re in growth, in companies that invest everything in R&D, ROI can be in the red for years without it meaning failure.

The formula is ridiculously simple: Profit divided by Total Investment. That’s it. With that, you can compare two stocks, two projects, whatever. If you have 10,000 euros to invest in two assets, 50% in each, and one gives you 5,960 euros (ROI of 19.2%) and the other gives you 4,876 euros (ROI of -2.48%), it’s obvious which one to choose. Or if your company invests 60,000 in remodeling stores and that increases its value to 120,000, you have a 100% ROI.

But here’s the important part: don’t rely on this ratio alone. Economic profitability is an indicator, not the absolute truth. It should be viewed alongside other data: the P/E ratio, EPS, growth trajectory, the sector it operates in. Apple, for example, has an ROI over 70%, making it one of the best at managing its investments. That’s no coincidence; it’s the result of brutal margins per brand and technology.

What is true is that when you’re looking for companies that know how to efficiently generate returns on their capital, this number is fundamental. Poor resource allocation destroys results, and ROI shows you that. That’s why, before investing anywhere, look at the historical trend of economic profitability, but don’t rely solely on it. A low ratio can be a bargain or a trap. A high ratio can be great or an illusion. It all depends on the context.