Final answer:
Return on Equity (ROE) relates net income and stockholders' equity and is different from Return on Investment (ROI). It measures how effectively a company uses investment to generate earnings, while ROI measures the gain relative to the investment's cost. ROE is important for investors considering profits from dividends or capital gains.
Step-by-step explanation:
The Return on Equity (ROE) measures the profitability of a company in relation to stockholders' equity, and it relates net income and stockholders' equity, not dividends. ROE is calculated by dividing a company's net income by its stockholders' equity, giving investors an idea of how effectively their capital is being used to generate profits. It is distinct from Return on Investment (ROI), which considers the gain from an investment relative to its cost. When a company goes public through an initial public offering (IPO), it receives money from the stock sale, providing funds to repay early-stage investors and for expanding operations. Investors expect a rate of return that can come from dividends or capital gains, where dividends are a direct payment, and capital gains result from selling the stock at a higher price than purchased.