Return on Equity (ROE) is one of the financial ratio used by stock investors in analyzing stocks. It indicates how effective the management team is in converting the reinvested money into profits. The higher the ROE, the more money a company able to generate for the same dollar amount spent.

[edit] Steps

Calculate Shareholders' Equity (SE) by substracting the Total Assets (TA) by the Total Liabilities (TL), (SE=TA-TL).
Calculate the average shareholders' equity from the beginning (SE1) and the ending (SE2) of financial year, (SEavg=(SE1+SE2)/2)
Find the Net Profits (NP) from the annual report.
Calculate ROE by dividing the net profits by the average of shareholders' equity, (ROE=NP/SEavg).

[edit] Tips

Company with ROE of 15-25% is simply exceptional.
Avoid company that have ROE of 5% or less

[edit] Warnings

The management can made up the ROE to looks good by distributing dividends to its shareholders. So, you should look for consistently giving excellent ROE than just a one year performance.