Which investment return metric is essential for shareholders to understand profitability?

Return on equity (ROE) is a critical metric for shareholders when assessing a company's profitability because it measures the ability of a company to generate profits from its equity. Specifically, ROE indicates how effectively management is using shareholders’ investments to produce earnings. It is calculated by dividing net income by shareholders' equity, providing insight into how well a company translates equity investments into profit.

Investors and shareholders are especially interested in ROE because a higher ROE signifies a more efficient company in terms of profit generation relative to its shareholder equity. By understanding ROE, shareholders can gauge the company’s financial health, compare it with other firms in the same industry, and make informed decisions about their investments.

Other metrics like net present value, capital asset pricing model, and internal rate of return are useful in specific contexts, such as project evaluation or investment analysis, but they do not directly measure profitability in the same way that ROE does for equity shareholders.