What does the return on common equity measure?

The return on common equity specifically measures the return earned on the common stockholders' investment in a firm. This metric focuses on the profitability attributed to the shareholders after taking into account the equity that they have invested. It provides insight into how effectively the company is using the equity from its common stockholders to generate profit.

Calculating return on common equity involves dividing net income available to common shareholders by the average total common equity for a given period. This ratio is important as it reflects the company’s efficiency in generating profits from its equity financing, which is crucial for investors assessing the potential return on their investments.

In contrast to this, the other options relate to different aspects of financial performance. For example, measuring the return on total assets assesses how efficiently a company uses all its assets, not just equity. The overall profitability of a firm can involve various accounting metrics and is not limited to the interests of common shareholders alone. Additionally, the revenue generated per share of common stock focuses more on sales performance than on the profitability returned to shareholders. Thus, option B accurately captures the essence of what return on common equity represents.