Certified Financial Management Specialist Practice Exam

Return on Equity (ROE) measures net income relative to which of the following?

1. Total liabilities

2. Total assets

3. Owner's equity

4. Current assets

The correct answer is: Owner's equity

Return on Equity (ROE) is a financial metric that assesses a company's ability to generate profit relative to the equity held by its shareholders. Specifically, ROE is calculated by dividing net income by the average owner's equity. This measure provides insight into how efficiently a company is using its equity base to generate profits. By focusing on owner's equity, ROE highlights the return generated on the shareholders' investment in the company. A higher ROE indicates that the company is effectively utilizing its equity to produce earnings, which is a crucial indicator of financial health and operational efficiency. This metric is particularly valuable for investors as it helps evaluate the profitability of their investment in the context of the company's equity capital. The other options, such as total liabilities, total assets, and current assets, do not relate directly to equity or reveal how effectively a company is using its equity to generate profits, making them less relevant in the context of calculating ROE.