Return on equity (or ROE for short) is calculated as:

ROE = Net Profit / Average Shareholder Equity for Period in Question

The shareholder equity is imply the total assets minus total liabilities of the company, and the net profit is the total income minus total expenses of the company.

http://beginnersinvest.about.com/od/incomestatementanalysis/a/understanding-return-on-equity.htm provides a good primer on this, and explains why ROE is so important: "The return on equity figure takes into account the retained earnings from previous years, and tells investors how effectively their capital is being reinvested. Thus, it serves as a far better gauge of management's fiscal adeptness than the annual earnings per share. "

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