Which of the following best describes the concept of return on equity (ROE)?

Return on equity (ROE) is a financial metric that indicates how effectively a company is using its equity base to generate profits. It is calculated by dividing net income by the average shareholders' equity over a specific period. This measurement provides insight into how well a company is performing in terms of profitability relative to the equity that shareholders have invested in the company. A higher ROE suggests that the company is efficient in using its equity capital to generate income, which is a key aspect for potential investors to consider.

By focusing on net income generated specifically from shareholders' equity, ROE helps assess the return that the shareholders can expect on their investment. This makes it a crucial metric for evaluating the financial performance of a company from the perspective of its equity holders.