Which equation properly describes return on equity?

Return on equity (ROE) is a financial metric that measures the ability of a company to generate profits from its shareholders' equity. It is calculated by dividing the net income of the company by the shareholders' equity. This ratio provides insight into how efficiently a company is utilizing the equity invested by its shareholders to produce profits.

The correct equation highlights the relationship between net income—which reflects the company's profitability—and shareholders' equity, which represents the owners' claim on the company's assets after liabilities have been deducted. A higher ROE indicates that a company is more effective at converting the investment into profit, which is attractive to investors.

In contrast, the other options do not accurately describe return on equity as they focus on different measurements or relationships not pertinent to evaluating shareholder returns. For example, dividing net income by total assets assesses asset efficiency rather than equity utilization, while operating income divided by equity focuses on operational performance without accounting for net income. Lastly, net assets divided by total income does not correctly frame the relationship between shareholder equity and profit generation, thereby failing to represent the essence of return on equity.