The Return on Equity Ratio (ROE) is a measure of what?

The Return on Equity Ratio (ROE) specifically measures a company's profitability in relation to the equity that shareholders have invested in the business. This means that it calculates how effectively a company is using its equity base to generate profits. The ROE is expressed as a percentage and is derived by dividing net income by shareholder equity.

A higher ROE indicates that the company is more efficient at generating profits from every dollar of shareholder equity, which is a crucial metric for investors assessing a company's financial health and return potential. In contrast to the other options, ROE directly ties the company's profits to its equity, providing insights into how well management is utilizing the shareholders' capital to drive growth and profitability.