What is Return on Equity (ROE)?

Return on equity (ROE) is a system used to determine profitability versus stockholder equity. ROE is generally determined by dividing net income by the total amount of equity. When ROE is calculated, it is sometimes called the return on net assets because it involves the subtraction of all debt and is based on net income instead of gross income. ROE is calculated to determine how much profit is generated for each dollar of equity invested and helps institutional investors gauge how well their company is performing.