What does return on equity (ROE) represent?

Return on equity (ROE) represents a key measure of financial performance that is calculated by taking the net income generated by a company and dividing it by the shareholders' equity. This ratio provides insight into how effectively a company is utilizing the capital invested by its shareholders to generate profits. A higher ROE indicates a more efficient use of equity capital, meaning that the company is able to generate more profit for each dollar of equity invested.

This performance metric is crucial for investors as it helps to evaluate a company’s profitability and overall financial health from the perspective of the equity holders. It essentially reflects the company's ability to turn equity into profit, making it a vital tool for assessing the return on investment for shareholders.