What does return on equity (ROE) indicate?

Return on Equity (ROE) is a key financial metric that indicates how efficiently a company is using the capital invested by its shareholders to generate profits. It measures the net earnings produced relative to the shareholders' equity, which is essentially the amount of money that shareholders have invested in the company.

When ROE is expressed as a percentage, it provides insight into how well a company is utilizing equity financing to enhance profitability. A higher ROE suggests that the company is effectively turning equity into profit, indicating strong financial performance and effective management.

This metric is especially important for investors and analysts as it helps in evaluating the profitability and financial efficiency of a company in relation to the owners' equity. It is a vital aspect of financial analysis, allowing stakeholders to make informed decisions regarding their investment's potential returns.