Equity investors are looking for the company to grow, increasing the value of the company, and therefore shareholder's equity.

One way to measure the success of a company doing so is to look at the return on equity. This is an important financial metric that is commonly used to measure a company's profitability in relation to its equity.

It's expressed as a percentage and can be calculated using the following formula, return on equity or ROE equals net income or profits, divided by shareholders' equity.

And remember, loosely speaking, the net income of a company would be given by revenue minus costs.

Let's look at an example using the company we looked at earlier. Let's assume that at the end of the next business year, the total value of its assets has risen from 100 million to 107 million.

We're not going to worry about the precise components of this movement, what the revenues were, what the cost of sales were, taxes, depreciation, and so on. We're simply going to state that the company's assets increased by 7 million in the year due to the net income and profit that they made.

Assuming that no new debt has been taken on and no debt has been repaid, this results in an increase in equity of 7 million as well. To calculate the ROE, we now simply divide the net income of 7 million by the opening shareholder's equity, which was 40 million, and as a result, we get a return on equity of 17.5%.

Please note, however, that we might not use the equity from the beginning of the year, but in practice, we might take the average of the shareholder's equity over the period to reflect any capital measures taken.