Which metric measures profitability relative to shareholders' equity?

• A. ROI
• B. ROE
• C. ROIC
• D. EVA

Answer: (B)

Profitability relative to shareholders' equity is captured by return on equity. It measures how much net income a company generates for each dollar of equity that shareholders have invested. ROE = net income divided by shareholders’ equity, so it directly reflects how efficiently management uses investors’ funds to create profits. A high ROE signals strong profitability per unit of equity, though it can be driven by higher leverage, which brings its own risks.

Other metrics look at different bases: ROI focuses on the return relative to a specific investment or project, not overall equity; ROIC measures return on all capital employed (both debt and equity) in the business; and EVA examines value created above the cost of all capital, not just equity.