How is the return on equity (ROE) calculated?

The return on equity (ROE) is calculated as the net income divided by shareholder's equity. This metric measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. It reflects the efficiency with which a company is using its equity base to generate profits.

By dividing net income by shareholder's equity, investors can assess how well their capital is being utilized to produce earnings. A higher ROE indicates more effective use of equity, which is generally favorable for investors. This calculation is fundamental in financial analysis as it provides insights into the company's financial performance and can impact investment decisions.

The other options represent different financial ratios or calculations that do not correctly define ROE. For instance, total assets are not relevant in the calculation of ROE, and subtracting liabilities from net income does not adhere to the standard definition of ROE. Similarly, dividends do not correspond to the profit-generating aspects measured in ROE but rather pertain to the distribution of earnings to shareholders.