Return on Equity is calculated as:

Return on Equity is calculated as:

• A. Revenue ÷ Assets
• B. Liabilities ÷ Equity
• C. Profit ÷ Liabilities
• D. Profit ÷ Equity

Answer: (D)

Return on Equity shows how effectively owners’ funds are turned into profit. It measures profit relative to the equity investors have in the company, so the formula uses profit (net income) divided by equity. Revenue divided by assets would tell you about how efficiently assets generate revenue, not how much profit is earned for each dollar of owners’ equity. Liabilities divided by equity is a leverage or debt‑to‑equity measure, not profitability. Profit divided by liabilities would not reflect ownership return either. Therefore, the correct approach is profit divided by equity. (Note: in practice you might use net income over average equity to smooth over the period.)

Return on Equity shows how effectively owners’ funds are turned into profit. It measures profit relative to the equity investors have in the company, so the formula uses profit (net income) divided by equity. Revenue divided by assets would tell you about how efficiently assets generate revenue, not how much profit is earned for each dollar of owners’ equity. Liabilities divided by equity is a leverage or debt‑to‑equity measure, not profitability. Profit divided by liabilities would not reflect ownership return either. Therefore, the correct approach is profit divided by equity. (Note: in practice you might use net income over average equity to smooth over the period.)