Return on equity
A) is an activity ratio.
B) shows how much after-tax profits are generated by each dollar of sales.
C) is referred to by the acronym ROI.
D) measures the rate of return on the book value of shareholders' total investment in the company.
E) is a leverage ratio.

Question

Quizplus · Accepted Answer

Return on equity (ROE) measures the rate of return on the book value of shareholders' total investment in the company. It is calculated as net income divided by shareholders' equity. ROE is a profitability ratio, not an activity ratio like A. It is not the same as ROI (return on investment), which is a broader measure that takes into account all forms of capital (debt and equity). It is also not a measure of sales like B. Finally, it is not a leverage ratio like E, which would typically focus on the relationship between debt and equity financing.

Return on Equity