What does Return on Equity measure?

Return on Equity (ROE) measures the percentage of income generated relative to the total equity of the company. It is a crucial financial metric that shows how effectively a company is using its equity to generate profits. Specifically, ROE is calculated by taking the net income of the company and dividing it by shareholders' equity. This ratio provides insight into how well management is utilizing the invested capital to generate earnings and indicates the efficiency of a company in generating returns for its shareholders.

In contrast, the other choices relate to different aspects of financial performance and management:

• The option that mentions overall company revenue generation does not reflect the specific relationship between profits and equity, as it focuses solely on revenue without considering profitability or equity.
• The choice regarding total assets divided by equity pertains to a different ratio called the equity multiplier, which reflects the company’s financial leverage rather than its profitability relative to equity.
• The reference to market share relative to competitors does not align with the concept of ROE, as it deals with a company’s position within the market rather than its financial returns on equity.

Thus, the correct choice reflects the specific measure that ROE evaluates, highlighting its importance in assessing financial performance from the perspective of equity stakeholders.