What is "return on equity"?

Return on equity is a measure of profitability that reveals how much net income a business earns as a percent of the amount shareholders invest. The formula is net income divided by shareholder's equity for a given period of time.

If net income for a given period is $10,000 and shareholder's equity equals $100,000, return on equity is 10 percent. To understand whether a particular return is reasonable, a company compares its return to industry norms and recent trends. If the return on equity is lower than the norm and falling relative to historical averages, the company may need to take measures to improve profitability.