 Return on equity measures the relationship between net income and common stockholders investment in the company, meaning how much income is earned for every dollar invested. Sometimes this ratio is called ROI or return on investment. Return on equity is a measure of profitability. Return on equity is calculated as net income minus preferred stock dividends highlighted by average common stockholders equity. Common stockholders equity is all of the stockholders equity minus the preferred stock. Here is an income statement from our sample company. We'll use the highlighted net income to determine the return on equity. And here's a balance sheet from our sample company. We'll use the highlighted total stockholders equity and preferred stock to determine the average common equity. For 2016, net income minus preferred stock dividends, which I've assumed to be $100 for this example, divided by average common equity gives us a return on equity of 67 cents for every dollar invested. And that result is quite high.