 In order to understand how the profitability of a company can be assessed, we use the concept of different financial ratio and one of the many very useful financial ratio is the concept of is the ratio or the concept of return on equity which is abbreviated as ROE. When we take into account ROE, it basically tells you the ratio of net income and the shareholders equity. So, we consider how much a company owes debt and that is accounted for when we calculate ROE. So, basically it gives you an idea that what is the ratio with which the proportion of net income is earned because of the shareholders' participation or investment in that company. So, when we look at the formula or the look at the details of ROE, it is basically obtained by dividing the net income's value by the shareholders' equity and it is also considered as the return on net assets. Why I am using net assets because when you are going to calculate, find out the denominator value, you are going to consider the debt also and that debt will be subtracted from the overall value of the company's assets. So, ROE is considered as a measure of how effectively management is managing a company and how nicely they are utilizing the company's assets to make or create profits. So, when we look at the formula of ROE, as I mentioned earlier that it is basically the value obtained by dividing net income earned by a company during a certain time period and then you are going to divide net income's value by the average shareholders' equity and this is how you are going to get the value of ROE and when you talk about the net income, it is the amount of income which is net of expenses that you are considering the expenses in order to find out the difference between the overall gross income and then you are going to subtract the expenses and then you are going to take into consideration the taxes also that is something which is not going to stay with you. So, the taxes will be deducted as well in order to find out the value of net income and this will give you the value that you are going to put in the numerator. When we say what is meant by average shareholders' equity, it is basically calculated by adding the equity at the beginning of the period. The beginning and the end of the period should coincide with that with which the net income is earned. So, that is something which is a checkmark that you are going to calculate the average shareholders' equity. So, when we calculate net income over the last one year or the full fiscal year, you can find out the value of the net income from the income statement and we have already discussed the three different types of financial statements and we discussed the components of income statement also. So, in order to search for the value of net income in order to calculate the value of ROE, So, then when you are going to look for the shareholders' equity value, for that you have to refer to the balance sheet. So, from the balance sheet, you will find out the equity value of the shareholders. So, take those two values and divide the net income with the shareholder activity equity, then you will get the value of ROE. As you can see here, I am going to show you an example. They have been taken from the examples we discussed in the financial statements. When I illustrated or explained the different types of financial statements, I discussed the company ABC's data with you. They have been taken from there. So, I already told you that we will get the net income from the income statement. For the shareholders' equity, we will have to look at the balance sheet. So, this is $23.4 or $300 from there. ROE is calculated. So, if we express the value of ROE in percentage form, that turns out to be 7.8%. So, this is how we calculate ROE and when ROE's value is very high or very low, then that type of observation is observed when we have different industries' values. So, basically, we cannot say that ROE is a pharmaceutical company. We will match ROE for comparison with some hotel's ROE calculation because you can see a lot of variations in that. So, it is better to compare the values of ROE in order to understand whether my company or the company where I have invested is doing good in terms of financial profitability. So, when we are going to evaluate the financial performance of a company, it is essential, important, necessary that you compare the ROE of your company with the company in the same sector comparison purpose. There is another very common shortcut which is used by the investors. It is considered that if the ROE is somewhat close to 14%, then the company is considered to be doing good. If it is lower than 14%, that is considered to be the benchmark. International company's ROE or their financial performance, if you have to evaluate or compare, the benchmark used on the international level, that is a 14% value. So, if your company is doing good in terms of ROE, ROE is above 14%, it means that your company is showing excellent financial performance. But if it is lower than 14%, it means that on average, your global average performance, here financial performance company, your company is performing under it. So, this is how we try to assess or compare the financial performance of a company by considering the values of return on equity values.