What is the formula for calculating the return on equity ratio?

The return on equity (ROE) ratio is a key financial metric that indicates how effectively a company is using shareholders' equity to generate profit. The formula for ROE is net income divided by shareholders' equity. This calculation shows the percentage return that shareholders are earning on their investment in the company.

By using net income in the numerator, the formula captures the company's profitability after all expenses and taxes, while the denominator reflects the total equity contributed by shareholders. A higher ROE suggests that a company is more efficient at converting equity financing into profits, which is an important indicator of financial health and operational performance.

The other options, while related to financial performance, do not correctly reflect how to calculate return on equity. Net income divided by total assets measures return on assets (ROA), while revenue divided by shareholders' equity does not take profit into account, making it an unsuitable measure for ROE. Similarly, operating income divided by total liabilities relates to a different financial analysis and does not pertain to the equity of shareholders. Thus, the correct understanding of ROE is critical for analyzing a firm's equity efficiency and overall profitability.