Return on equity is calculated using which formula?

Return on equity (ROE) is a key financial metric that assesses a company's profitability in relation to the shareholders' equity. The formula for calculating ROE is net income divided by shareholders' equity. This ratio essentially measures how effectively management is using a company’s assets to create profits; it indicates how well stockholders' investments are being utilized to generate earnings.

Using net income in this calculation reflects the company's profit after all expenses, taxes, and costs have been deducted, illustrating the actual earnings generated for the owners of the company. Shareholders’ equity represents the money that would be returned to shareholders if all the assets were liquidated and all the company’s debts were paid off. Thus, dividing net income by shareholders' equity provides a clear picture of the company's efficiency in employing equity to generate profits.

The other formulas do not capture the relationship of net income to equity, which is central to calculating ROE. For instance, dividing net income by total assets would yield a return on assets (ROA) metric instead, which looks at how efficiently a company uses all its assets, not just equity. Other options address different financial relationships that may not relate directly to evaluating returns specifically for equity holders.