ROE vs ROI: Understand these key metrics to optimize your trading portfolio

Why Should You Monitor Your Return on Investment?

If you’re involved in trading, especially with cryptocurrencies, you need a metric that tells you if your money is truly working for you. This is where two fundamental indicators come into play: ROE and ROI. Although they sound similar, they work very differently and both help you understand whether your decisions are profitable.

The main difference lies in this: while some metrics show how a company manages its capital, others reveal if your personal investment strategy actually generated gains. For a crypto trader dealing with Bitcoin, Ethereum, or altcoins, knowing how to interpret these numbers makes the difference between a growing portfolio and one that stagnates.

Return on Equity: What Is ROE Really?

ROE measures how efficiently a company converts shareholder capital into profits. In simple terms, it shows what percentage of profit a company generates for each unit of money its owners have invested.

To calculate it, take the company’s annual net profit and divide it by the total shareholders’ equity. Multiply the result by 100 to get a percentage. A company with a high ROE uses its capital more efficiently than one with a low ROE.

Basic formula: ROE = (Net Profit / Shareholders’ Equity) × 100

How to interpret this indicator in comparisons

When evaluating whether to invest in a company, it’s not enough to look at its ROE in isolation. You should compare it with the industry average. For example, consider this hypothetical situation:

• Company A (entertainment software): ROE of 42.1%
• Company B (internet software): ROE of 14.9%

At first glance, it seems that Company A is much better. But here’s the trick: if the entertainment sector has an average ROE of 35%, then Company A only slightly surpasses its competitors. Conversely, if the internet sector averages 12%, then Company B is outperforming the market.

Real cases of large companies

To put things into perspective, in 2022, companies like Alphabet Inc. reported an ROE of 26.41%, while Amazon showed 8.37%. These numbers reflect completely different business models, not necessarily a “better” or “worse” profitability.

Trap: High ROE doesn’t always mean better management

Here’s an important warning: a high ROE can be misleading. A company might artificially inflate it in several ways:

• Increasing debt: Leverage (borrowing money) can boost ROE even if the company isn’t generating better profits.
• Share buybacks: When a company repurchases its own shares, it reduces shareholders’ equity (the denominator), which automatically increases ROE without actual profit growth.
• One-time events: Inventory liquidations or extraordinary expenses can distort numbers for a single year.

That’s why analysts dig deeper: they don’t just look at the current number but also how ROE has evolved over 5 or 10 years.

ROI: The Metric Traders Really Need

ROI (Return on Investment) is more straightforward and personal. It simply tells you: if you invested $X, how much did you gain or lose?

Formula: ROI = [(Sale Price - Original Price) / Original Price] × 100

Practical example in crypto assets

Suppose you bought Bitcoin at $5,000 and sold it at $20,000. Your calculation would be:

ROI = [($20,000 - $5,000) / $5,000] × 100 = 300%

This means you tripled your initial investment. A positive result indicates you made money; a negative one means you lost.

Why measure ROI in your crypto trading?

To optimize your portfolio: Knowing exactly which assets generate good returns and which don’t allows you to decide whether to sell underperforming assets and reinvest that capital into more promising opportunities.

To calculate your cash flow: Understanding the ROI of your current investments helps determine how much available money you have for new trades. A positive cash flow is essential for growing your portfolio without resorting to additional capital.

Limitations of ROI in cryptocurrencies

Although ROI is useful, it has significant blind spots:

• Ignores time: A 50% ROI over 10 years is very different from 50% over 1 month, yet both appear identical.
• Overlooks actual costs: Transaction fees, trading commissions, taxes, and slippage can eat into your gains significantly.
• Does not predict the future: A positive ROI in the past doesn’t guarantee future results.

How to Use Both Metrics in Your Strategy

For crypto traders and investors, the best practice is to combine both approaches:

Use ROE if you’re considering investing in blockchain projects or stocks of companies related to crypto. It helps evaluate whether those projects generate value efficiently.

Use ROI to monitor your personal performance. Regularly calculate (monthly, quarterly, yearly) how your portfolio is performing in terms of actual gains or losses.

The factor of time in your analysis

A positive ROI generally suggests that your investment in cryptocurrencies was worthwhile. A negative ROI is a warning sign: that asset has lost value. Cryptocurrencies with negative ROI require careful evaluation, as they might never recover the expected value.

But before making decisions, analyze the context: how much time has passed? What’s the price history of the asset? What technical progress has it made in recent years? Ethereum, Bitcoin, and other altcoins have very different cycles, and time plays a crucial role.

Conclusion: Metrics Guide You, But You Decide

Both ROE and ROI are valuable tools, but neither tells the whole story. ROE helps you assess company efficiency; ROI shows whether your money truly grew. In crypto trading, both are useful for making informed decisions and avoiding common pitfalls. The key is to use them together, understand their limitations, and always research beyond the numbers to get the full picture.