How to Master Financial Profitability: Discover ROE and Its Application in Crypto Asset Operations

▶ The Profitability Formula: Understanding ROE

Identifying undervalued companies or assets requires developing a keen eye for analyzing their fundamentals. Operators look for assets with solid management, efficient returns, and competitive prices. The return on equity metric (ROE) is fundamental in this process: it clearly reveals how effectively an organization converts invested capital into profits.

ROE measures a company’s ability to generate profits with the money contributed by its shareholders. It is calculated by dividing net income by shareholders’ equity, multiplied by 100 to get a percentage. This ratio shows how efficiently the available capital is used to produce income.

● Deciphering the Financial Return Formula

The calculation structure is simple but revealing. We take the annual net income (profit after expenses) and divide it by the total shareholders’ equity (rights of owners over assets, minus debts). The result is a percentage indicating how much profit the company generates per unit of capital.

For example, if an organization reports a net profit of USD 18,500 million and shareholders’ equity of USD 124,000 million, the operation would be: 18,500 ÷ 124,000 = 0.149, equivalent to 14.9%. This means that for every dollar of invested capital, the company generates 14.9 cents in profit.

From a comparative analysis perspective, ROE allows comparing efficiency among competitors. A higher financial return indicates better utilization of shareholders’ equity. In 2022, while an entertainment software company showed an ROE of 42.1%, its internet sector competitor only had 14.9%. However, these numbers require context: the weighted average of the S&P 500 in 2017 was 18.6%, with significant variations among players like Alphabet Inc. (26.41%) and Amazon (8.37%).

● Precautions When Interpreting the Metric

An extraordinarily high ROE can hide problematic realities. When inflated figures appear, it’s advisable to investigate further. It could reflect negative net earnings combined with negative shareholders’ equity, creating a misleading result. It may also indicate previous years of losses followed by an exceptional quarter with artificially depressed shareholders’ equity.

Financial leverage presents another risk. A company can increase its ROE simply by taking on more debt if the returns on those loans exceed their costs. This is a double-edged sword: it amplifies gains in bullish cycles but also magnifies losses when markets retract. Share buybacks and dividend payments can also distort the indicator by reducing the denominator of the calculation. One-off events like inventory depreciation have similar impacts.

For these reasons, analysts never use ROE as an isolated metric. Complementing it with return on investment (ROI) and other indicators provides a more comprehensive view of financial health.

● Practical Application: From Stock Market to Cryptocurrencies

Is it possible to calculate similar profitability with Bitcoin, Ethereum, and altcoins? Technically yes, although the context differs substantially. While ROE measures business efficiency, in cryptocurrencies we work with short-term price speculation.

Suppose you acquire a crypto asset at USD 5,000 and sell it at USD 20,000. The ROI would be: (20,000 - 5,000) ÷ 5,000 = 3.0, representing a 300% gain. This calculation is straightforward but incomplete: it does not consider transaction fees, trading commissions, or the time factor.

In crypto trading, analysis requires additional depth. Investigating the asset’s historical performance, its trajectory over recent years, and technological progress is essential before committing capital. A positive ROI suggests an upward trend and validation of the investment thesis. A negative ROI indicates value loss and requires cautious management.

● Monthly Return and Portfolio Management

Calculating periodic returns on crypto investments serves multiple strategic purposes:

Portfolio Optimization: With the ROI identified for each position, quickly detect which assets are meeting objectives and which are lagging. If an investment does not generate expected returns, the decision to sell and reallocate to more promising alternatives becomes clear.

Operational Cash Flow: Understanding how much money each investment generates is crucial for calculating available funds for new operations. A positive cash flow opens growth opportunities. This clarity on real numbers allows for informed expansion decisions.

Continuous Monitoring: Monthly trading profitability establishes a monitoring system. If performance consistently falls below acceptable parameters, it signals that the strategy needs adjustment or that positions should be rotated.

● Summary: Metrics That Matter

Both in traditional markets and cryptocurrencies, profitability metrics are decision tools, not guaranteed predictions. ROE and ROI provide clarity on how efficiently your capital works, but they do not capture the full complexity of risk and opportunity.

For crypto operators, these indicators are especially valuable when assessing whether current positions deserve to be maintained or if capital should be reallocated. Financial profitability in any form requires diligence, contextualization, and the use of multiple analytical lenses. Only then can you make well-founded and sustainable investment decisions over time.