What is Return on Equity (ROE)?

Return on Equity (ROE) is a key financial performance metric used to assess how efficiently a company uses its equity to generate profit. Specifically, it is calculated by dividing net income by shareholders' equity. This calculation provides insight into how well the company is utilizing the funds provided by its shareholders to generate earnings. A higher ROE indicates a more effective use of equity, showcasing the company’s ability to generate profit from its shareholders' investments.

The other options do not accurately describe ROE. For instance, while cash flow from investing activities is important, it pertains to the cash that a company generates or consumes in its investment operations rather than profit generation relative to equity. Similarly, profit margins over time involve the relationship between revenue and profit, which does not specifically relate to shareholders' equity. Lastly, the percentage of profits reinvested in the business is more about retention ratios or plowback ratios, since it focuses on what portion of the earnings is reinvested rather than the overall profitability relative to equity.