What does the return on equity (ROE) ratio measure?

The return on equity (ROE) ratio measures the profits earned for each dollar invested in a company's equity. This financial metric is crucial for assessing how effectively management is using shareholders' funds to generate profits. ROE is calculated by dividing net income by shareholder equity, providing a clear indicator of the company's ability to turn equity investments into profit. A high ROE suggests that the company is efficient at converting the investment into earnings, which can be a key factor for investors when evaluating the potential for returns on their investment.

While the other options touch on important aspects of financial analysis, they are not what the ROE specifically addresses. For instance, efficiency in producing revenue is more aligned with metrics like operating margin or asset turnover, rather than ROE. Similarly, total debt relative to equity relates to leverage ratios and does not pertain to the profitability aspect of equity investment. Lastly, a company's liquidity position is assessed through ratios such as current ratio or quick ratio, which focus on short-term financial health, rather than the profitability derived from equity.