What is "return on equity" (ROE)?

Return on equity (ROE) is defined as a measure of profitability that indicates how effectively a company utilizes its shareholders' equity to generate profit. It is calculated by dividing net income by shareholder equity, resulting in a percentage that reflects the return generated for shareholders based on their investment in the company. A higher ROE signifies that the company is able to generate more profit for each dollar of equity, showcasing management's efficiency in using equity financing. This measurement is crucial for investors as it helps assess how well their investments are performing relative to the company’s equity base.

The other options might describe aspects of financial performance or efficiency, but they do not capture the specific focus of ROE on profitability in relation to shareholders' equity.