What financial ratio is calculated as net income divided by shareholders' equity?

The ratio calculated as net income divided by shareholders’ equity is return on equity, or ROE.

ROE measures how effectively a company generates profit from the capital shareholders have invested. It is commonly written as net income divided by average shareholders’ equity, although simplified quiz definitions often use ending equity. The result is usually expressed as a percentage.

For example, a company earning $10 million with $50 million in shareholders’ equity has a 20% ROE. Investors often compare ROE across companies in the same industry, because capital requirements and normal profitability vary considerably between sectors.

ROE can be influenced by leverage as well as operating performance. A company that uses substantial debt may report a higher ROE because it has a smaller equity base, so a strong figure does not automatically mean the business is safer or better managed. Return on assets instead divides net income by total assets, while gross margin focuses on sales minus the cost of goods sold. Earnings per share measures profit allocated to each share, making it a different metric.