The return on equity (ROE) is a measure of the profitability of a business in relation to its equity;[1] where: Thus, ROE is equal to a fiscal year's net income (after preferred stock dividends, before common stock dividends), divided by total equity (excluding preferred shares), expressed as a percentage.
As with return on capital, an ROE is a measure of management's ability to generate income from the equity available to it.
[2] ROE is also a factor in stock valuation, in association with other financial ratios.
Note though that, while higher ROE ought intuitively to imply higher stock prices, in reality, predicting the stock value of a company based on its ROE is dependent on too many other factors to be of use by itself.
The DuPont formula, [4] also known as the strategic profit model, is a framework allowing management to decompose ROE into three actionable components; these "drivers of value" being the efficiency of operations, asset usage, and finance.