Certified Management Accountant Practice Exam 2025 – The Comprehensive All-in-One Guide to Exam Success!

Return on Equity (ROE) is a financial metric that assesses a company's ability to generate profit relative to the equity invested by shareholders. Specifically, it is calculated by dividing net income by the average stockholders' equity during a specific period. This ratio provides valuable insight into how effectively a company is utilizing the equity financing provided by its shareholders to generate earnings.

A higher ROE indicates that the company is efficient in converting the equity investments into net income, which is an attractive trait for investors as it suggests good management and strong financial performance. Therefore, option B accurately represents the definition of ROE, as it highlights the relationship between net income and the equity capital invested by shareholders.

The other choices represent different financial ratios that measure other aspects of a company's performance or efficiency, not directly reflecting the relationship between net income and stockholders' equity, which is the essence of ROE. Thus, understanding ROE is crucial for evaluating a company's profitability in relation to the equity capital that shareholders have invested.