ROE = Net Income/Shareholders' Equity
ROE is sometimes called "return on net worth."
ROE = $10,000,000/$20,000,000 = 50%
This means that Company XYZ generated $0.50 of profit for every $1 of shareholders' equity last year, giving the stock an ROE of 50%.
It is important to note that if the value of the shareholders' equity goes down, ROE goes up. Thus, write-downs and share buybacks can artificially boost ROE. Likewise, a high level of debt can artificially boost ROE; after all, the more debt a company has, the less shareholders' equity it has (as a percentage of total assets), and the higher its ROE is.
Some industries tend to have higher returns on equity than others. As a result, comparisons of returns on equity are generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made within this context.
ROE = one year's earnings / shareholder equity
ROE = (one year's earnings / one year's sales) x (one year's sales / assets) x (assets / shareholder equity)