Improving trends indicate your business is doing well. Trends indicating deterioration are a clear warning of the need for change. This profitability measure reports net income after taxes as a percentage of net sales. It is calculated as the quotient of net income after taxes divided by net sales times 100. When the business operates at a loss, the profit margin is a negative percentage.
Profit margins vary widely depending on the type of business and the level of management.
This indicator is primarily useful for comparisons to industry averages and for analysis of trends. As a proprietor, you want this ratio to be positive with an upward trend. Except in rare instances, the value of this ratio is less than one. When multiplied by 100, ROA is expressed as a percentage. For a healthy business, you want ROA to equal or to exceed the rate of return for alternative investments with about the same level of risk.