Certified Management Accountant Practice Exam 2025 - Free CMA Practice Questions and Study Guide

Question: 1 / 430

Which formula represents Return on Equity (ROE)?

Net income divided by average total assets

Net income divided by total debt

Net Income divided by average total equity

Return on Equity (ROE) measures a company's profitability in relation to its shareholders' equity. It reflects how effectively management is using the equity investors' funds to generate profits. The formula for ROE is calculated as net income divided by average total equity.

When using this formula, net income represents the profit earned after all expenses and costs have been deducted. Average total equity is typically calculated as the sum of beginning and ending equity for a period, divided by two, which provides a more accurate representation of the equity at work over time.

This ratio is particularly useful for investors as it helps assess how well the company is using shareholders' capital to generate earnings. A higher ROE indicates more efficient use of equity capital, which can make the company more attractive to potential investors.

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Average total assets divided by average total equity

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