ROE

The speaker provides a basic overview of the return on equity formula and breaks it down into its components.  Return on equity takes net income and divides it by equity.  This formula breaks down into profit margin times equity turnover.  By breaking the formula down into these components, we are able to understand why a companies ROE is high due to their profits or their asset turnover.

The formula can be taken one step further to add a component of financial leverage to understand how much debt the company is taking; this is known as 3 step.  Finally, there is a 5 step calculation which is known as the dupont formula.  This formula is no longer used.