What does return on equity (ROE) measure?

Return on equity (ROE) measures profitability relative to shareholders' equity, providing insights into how effectively a company is using the resources provided by its shareholders to generate profits. It is calculated by dividing net income by shareholders' equity, resulting in a percentage that indicates how much profit a company earns for each dollar of equity. A higher ROE indicates that the company is more efficient at generating profits from its equity financing, which is often a key consideration for investors looking to evaluate a company's financial performance and attractiveness.

This measure is particularly important because it gives shareholders an understanding of their returns on investment. It reflects the company's ability to turn equity investments into profit, and a consistent or improving ROE can signal a well-managed company that effectively uses its funds to generate growth and deliver value to its shareholders.