Return on Equity (ROE) is defined as which ratio?

Return on Equity (ROE) is defined as which ratio?

• A. Net Income / Total Equity
• B. Net Income / Total Assets
• C. Revenue / Total Equity
• D. Net Income / Liabilities

Answer: (A)

Return on Equity shows how much profit is earned for every dollar of owners’ funds invested in the business. It is calculated by dividing net income by total equity (often using average equity over the period). This captures how efficiently management uses shareholders’ capital to generate earnings. A higher ROE means more effective use of equity, though it can be boosted by leverage if debt increases net income without a proportional rise in equity. Dividing net income by total assets would give return on assets, which measures profitability relative to all assets, not just owners’ equity. Using revenue instead of net income would assess sales activity rather than actual profitability. Dividing by liabilities isn’t a standard profitability metric and doesn’t measure earnings returned to owners.

Return on Equity shows how much profit is earned for every dollar of owners’ funds invested in the business. It is calculated by dividing net income by total equity (often using average equity over the period). This captures how efficiently management uses shareholders’ capital to generate earnings. A higher ROE means more effective use of equity, though it can be boosted by leverage if debt increases net income without a proportional rise in equity.

Dividing net income by total assets would give return on assets, which measures profitability relative to all assets, not just owners’ equity. Using revenue instead of net income would assess sales activity rather than actual profitability. Dividing by liabilities isn’t a standard profitability metric and doesn’t measure earnings returned to owners.