Return On Equity is also referred as return on net worth. It is usually expressed in percentage. As per ROE formula, the return on net worth is calculated by dividing net income by shareholder's equity. Net income is the income earned in one fiscal year, that is before dividends paid to common stockholders but after dividends to preferred stock. Shareholder's equity is a share that does not include preferred shares. Return on Equity Ratio Formula is used to know the profitability of the company and also to compare the performance.
Thus Return on Equity (ROE) formula is important to understand the ability of the company to generate revenue/profit with the money invested by the shareholders.