What does return on equity (ROE) measure?

Return on equity (ROE) measures the profitability relative to shareholders' investments. It reflects how effectively a company uses the capital invested by its shareholders to generate profits. Specifically, ROE is calculated by dividing net income by shareholders' equity. A higher ROE indicates that a company is more efficient at generating profits from every dollar of equity, which is a key consideration for investors when assessing the financial health and performance of a company. This metric provides insight into how well the management is utilizing the equity financing to grow the business and return value to its shareholders.

Other options do not accurately capture the essence of ROE: while total profit is important, it doesn't account for how that profit relates to the equity invested, nor does it show efficiency in asset utilization or market share, which are distinct concepts in financial analysis.