How is Return on Equity calculated?

Return on Equity (ROE) is a key financial metric used to measure a company's profitability relative to shareholders' equity. This ratio is calculated by taking the profit after tax and dividing it by the total equity of the company, then multiplying by 100 to express it as a percentage.

This calculation shows how effectively management is using shareholders' funds to generate profits. A higher ROE indicates that the company is more efficient at converting the equity investment into profit, thus providing a strong incentive for investors. This metric is particularly useful for comparing the financial performance of companies within the same industry.

The other options provided do not relate accurately to the definition of Return on Equity. For instance, dividing profit after tax by the number of issued ordinary shares measures earnings per share, which assesses profitability on a per-share basis rather than in relation to total equity. Profit from operations divided by total assets assesses operational efficiency and asset management, which is different from measuring returns on equity. Finally, the ratio of current assets to current liabilities is a liquidity metric, known as the current ratio, which indicates a company’s ability to cover its short-term obligations.