How is Return on Equity (ROE) calculated?

Return on Equity (ROE) is a key financial metric used to assess a company's efficiency at generating profits from its shareholders' equity. It is calculated by dividing net income by shareholders' equity. This ratio expresses how much profit a company generates with the money shareholders have invested, allowing investors to evaluate the company's profitability relative to their equity stake.

In this calculation, net income represents the profit available to shareholders after all expenses and taxes have been deducted, while shareholders' equity is the net assets of the company that belong to the shareholders. A higher ROE indicates more efficient use of equity capital, reflecting positively on the company's ability to generate earnings from its equity base.

Understanding ROE is crucial for investors, as it provides insights into how well a company is utilizing the funds provided by shareholders to grow and generate profits.