Return on equity (ROE) ratio measures the ability of a company to generate profits from its shareholders investments in the company. The return on equity ratio shows how much profit each dollar of common stockholders’ equity generates.

The return on equity ratio formula is calculated by dividing net income by shareholder’s equity.

Return on Equity = Net Income / Shareholder’s Equity

Investors track return on equity because it shows how effective management is at using investors money to fund operations and grow the company.

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