\[ \boxed {\mathrm{ROE} = \frac{\text{EAT}}{\text{EBT}} \times \frac{\text{EBT}}{\text{EBIT}} \times \frac{\text{EBIT}}{\text{Sales}} \times \frac{\text{Sales}}{\text{Avg. Assets}} \times \frac{\text{Avg. Assets}}{\text{Avg. Equity}}} \]
To memorize this, the denominator of the previous term turns into the numerator of the next one. Start at the bottom of the income statement and work your way up.
TIMEL:
- Tax: Start at the bottom of the income statement - that's Earnings After Tax. The first ratio is Earnings After Tax divided by Earnings Before Tax.
- Interest: this is earnings before tax divided by earnings before interest and taxes.
- Margins: this is earnings before interest and taxes over sales.
- Efficiency: this is sales divided by assets.
- Leverage is assets over equity.