What is the return on equity (ROE) used to measure?

Return on equity (ROE) is a financial metric used to assess a company's financial performance by measuring the profitability relative to shareholders' equity. It indicates how effectively a company is using the equity invested by its shareholders to generate profit. A high ROE suggests that the company is efficient in converting the equity financing provided by shareholders into earnings, which is a critical aspect of evaluating a firm's overall financial health.

While it is true that shareholder returns and financial performance are related concepts, ROE is specifically designed to indicate how well a company generates returns for its equity investors, making it a core measure of financial performance. The aspect of liquidity, on the other hand, deals with a company's ability to meet short-term obligations, while cost of goods sold is focused on the direct costs associated with producing goods. Neither of these factors directly relates to the focus of ROE on profitability relative to equity. Therefore, understanding ROE primarily reflects insights about financial performance and how efficiently equity is being used to generate profits.