Which financial measure evaluates how a company is capitalized?

The financial measure that evaluates how a company is capitalized is Return on Equity (ROE). This metric reflects how well a company uses its shareholders' equity to generate profits. ROE is calculated by dividing net income by shareholders' equity. It provides insight into the effectiveness of management in using equity investments to drive growth.

When assessing capitalization, ROE is particularly important because it indicates the return generated on the capital invested by the owners of the company. A higher ROE suggests that a company is effectively utilizing its capital base to produce earnings, which can be a key factor for investors considering the financial health and profitability of a business.

Other measures, while useful for evaluating different aspects of a company’s performance, do not specifically address how capitalized the company is. For instance, Return on Assets focuses on how efficiently a company uses its total assets to generate profit. Return on Sales measures profitability in relation to sales revenue, while Gross Margin evaluates the difference between sales and cost of goods sold, without directly considering equity investment or capitalization.