Equity has two main components capital (basically funds injected by the owners), and retained earnings which are profits of the business which have not been distributed to the owners but belong to the owners.

Equity = Capital + Retained Earnings

If a business has an operating income, after deductions for finance costs and tax a net income will remain.

If the net income is not paid out to the owners by way of a dividend, then it will be retained in the business.

The retained net income becomes part of retained earnings which increases the equity of the business.

Operating income return on equity should not be considered as a substitute for return on equity and does not reflect the overall profitability of our business.

Operating income that eventually becomes net income causes an increase in owners' equity.