Return on Equity (ROE) is calculated as which of the following?

• A. Net Income / Net Worth
• B. Net Income / Total Assets
• C. Net Income / Total Liabilities
• D. Net Income / Total Equity

Answer: (A)

Return on Equity shows how much profit a company earns for the owners’ stake in the business. The key denominator is the owners’ investment, known as shareholders’ equity. Net Worth is just another way to refer to that equity (assets minus liabilities), so dividing Net Income by Net Worth gives the same measure as dividing by Total Equity. That makes the option using Net Income over Net Worth the correct way to express ROE.

Dividing Net Income by Total Assets would yield Return on Assets, which reflects how efficiently all assets generate profit, not just the owners’ share. Dividing by Total Liabilities isn’t a standard profitability ratio and doesn’t relate to the owners’ return. While Net Income over Total Equity is the canonical form, Net Worth and Total Equity are effectively interchangeable in this context, so the chosen option aligns with the ROE concept.