In one sentenceNet profit divided by equity, showing what the owners earned on each riyal they invested or kept in the business.
Simply put
This is the owner's direct question: my money in the business (capital and retained earnings), how much did it earn this year? Compare the result with what your money could earn in another investment with similar risk.
A high figure may come from good profitability, or from heavy borrowing that reduces equity in the denominator, so read it together with the debt ratio.
Worked example
A feed factory made a net profit of 160,000 SAR, and its equity is 800,000 SAR.
Net profit160,000 SAR
Equity800,000 SAR
Return = 160,000 ÷ 800,00020%
Formula: Net profit ÷ equity
Don't confuse it with
Return on investmentReturn on investment measures a specific project or decision, and return on equity measures the whole business from the owners' point of view.