Which formula is used to calculate Return on Stockholders' Equity?

The formula for calculating Return on Stockholders' Equity (ROE) is Net Income divided by Average Stockholders' Equity. This metric is significant because it measures a company's ability to generate profits from its shareholders' investments. By using net income, which represents the total profit after expenses, taxes, and costs are subtracted, and dividing it by the average equity provided by shareholders, this formula provides insight into the efficiency of a company in utilizing its equity base to produce earnings. A higher ROE indicates that the company is effective in converting the equity investment into profit, which is a key indicator of a company's financial health and profitability. Understanding this formula is essential for assessing the performance of a business from an investment standpoint.