13 What does the return on common stockholders equity measur

13. What does the return on common stockholders\' equity measure?

Solution

13. ROE (return on equity) = Net income/Shareholder’s equity.

The return on common stockholder’s equity measures the ability of a company to generate profits from those investments that has been made by its common stockholders. The ratio determines and measures the quantum of profit that each dollar of common stockholder’s equity generated.

In other words the ratio measures the effectiveness of management at using equity financing to finance and fund its business and operations.