How is Return on Equity calculated?

Return on Equity (ROE) is calculated by dividing net income by stockholders' equity. This formula measures how efficiently a company uses shareholders' funds to generate profits. By focusing on net income, which reflects a company's profitability, in relation to the equity invested by shareholders, it provides insight into how well the company is performing in terms of return on investments made by its owners.

The use of stockholders' equity in the denominator is crucial because it signifies the portion of the company's assets that is financed by its owners. This metric allows investors to assess the effectiveness of management in utilizing equity financing to generate earnings, making ROE a vital indicator of financial performance.

The other options are not appropriate calculations for ROE. For example, using total assets would not reflect the capital structure specific to shareholders' equity, and measuring against total shares doesn't account for profitability relative to equity financing. Lastly, incorporating the debt equity ratio into the denominator does not align with the standard calculation for ROE, as it mixes different financial metrics without accurately showing returns specific to equity holders.