Which ratio helps evaluate how well a company uses investor money to make a profit?

The Return on Equity (ROE) ratio is a critical metric that evaluates how effectively a company uses the money invested by its shareholders to generate profits. It is calculated by dividing net income by shareholder's equity. This ratio reflects the profitability of a company in relation to the equity that shareholders have contributed, allowing investors to assess how well their investments are being managed and how efficiently the company is turning equity into profits.

This measure is particularly important because it gives shareholders insights into the company's ability to generate returns on their investments relative to the size of their equity stake. A higher ROE indicates that the company is more efficient at converting investments into profits, which can be a significant factor in investment decision-making.

While other ratios, like Return on Investment (ROI), also evaluate profitability related to investments, they do not focus specifically on shareholder equity. Earnings Per Share (EPS) focuses on profitability on a per-share basis rather than the efficiency of capital use. The Quick Ratio is a measure of liquidity and does not directly assess profitability from investor funds. Thus, ROE stands out as the most relevant ratio for evaluating the effectiveness of a company in using investor money to create profits.