What does "return on equity" (ROE) measure?

Return on equity (ROE) is a key financial metric that measures the ability of a company to generate profits from its shareholders' equity. Specifically, it calculates the amount of net income that is returned as a percentage of shareholders' equity, thereby providing insight into how efficiently a company is using the equity investments made by its shareholders to produce profit.

This metric is particularly valuable because it allows investors to evaluate the profitability of a company in relation to the equity capital invested in it. A higher ROE indicates that the company is effective in generating profits from its equity base, which can be a strong indicator of financial performance and management effectiveness.

The other options do not accurately capture the essence of ROE. For example, while dividend yield pertains to the cash dividends paid out to shareholders relative to their investment, it does not reflect the overall profitability involved in generating those returns. Similarly, the repayment ability of a firm relates more to its liquidity and solvency ratios rather than its efficiency in utilizing shareholder equity to generate profits. Total assets, on the other hand, provide an overview of the company’s resources but do not convey how well those assets are being used to generate income for equity holders. Thus, measuring the net income relative to shareholders' equity is what defines