Which financial metric compares net income to shareholders' equity?

Which financial metric compares net income to shareholders' equity?

• A. Return on assets
• B. Debt to equity ratio
• C. Return on equity
• D. Current ratio

Answer: (C)

The correct choice is the metric that specifically measures a company's ability to generate profit from its equity investments. This is known as return on equity (ROE). ROE is calculated by taking net income and dividing it by the average shareholders' equity, resulting in a percentage that reflects how effectively the company is using its equity base to generate profits. This metric is important for investors as it provides insights into how well a company is utilizing investors' capital. A higher ROE indicates more efficient use of equity, as it shows that the company is generating more profit per dollar of equity. The other financial metrics do not evaluate the relationship between net income and shareholders' equity in the same manner. For example, return on assets focuses on how efficiently a company uses its assets to generate earnings, while the debt to equity ratio analyzes the proportion of debt used in relation to shareholders' equity. The current ratio assesses a company's short-term liquidity by comparing current assets to current liabilities. Each of these metrics serves different purposes but does not provide the specific insight into profit generated from equity that is represented by return on equity.

The correct choice is the metric that specifically measures a company's ability to generate profit from its equity investments. This is known as return on equity (ROE). ROE is calculated by taking net income and dividing it by the average shareholders' equity, resulting in a percentage that reflects how effectively the company is using its equity base to generate profits.

This metric is important for investors as it provides insights into how well a company is utilizing investors' capital. A higher ROE indicates more efficient use of equity, as it shows that the company is generating more profit per dollar of equity.

The other financial metrics do not evaluate the relationship between net income and shareholders' equity in the same manner. For example, return on assets focuses on how efficiently a company uses its assets to generate earnings, while the debt to equity ratio analyzes the proportion of debt used in relation to shareholders' equity. The current ratio assesses a company's short-term liquidity by comparing current assets to current liabilities. Each of these metrics serves different purposes but does not provide the specific insight into profit generated from equity that is represented by return on equity.