Return on sales (RoS) is a standardized ratio that expresses a company’s profitability in proportion to its revenue.
Detailed Explanation
The RoS calculation quantifies how effectively a business operates by analyzing its ability to turn sales into profit. This resulting ratio reveals how much profit is generated per dollar of revenue. A rising RoS shows that a company is becoming more efficient, while a falling RoS may indicate financial difficulties.
To calculate ROS, simply divide your company’s operating profit by net sales. Don’t worry if you’re not a finance whiz – we’ll break it all down.
“Operating profit” refers to a company’s profit after costs but before deducting interest and taxes. For example, a business making $300,000 in revenue in a month has operating costs of $275,000:
Operating profit = Profit – Operating costs = $300,000 – $275,000 = $25,000
Net sales refer to a company’s total revenue after deducting discounts, allowances and sales. For example, a company’s gross sales are $300,000, discounts are $15,000, allowances are $30,000 and sales are $120,000:
Net sales = Gross sales – Discounts – Allowances – Sales = $300,000 – $15,000 – $30,000 – $120,000 = $135,000
Once you have your operating profit and net sales, you can calculate You RoS. Let’s find the RoS using the examples above:
RoS = Operating profit / Net sales = $25,000 / $135,000 = $0.185
Multiply the result by 100 to get a percentage figure. In this case:
$0.185 100 = 18.5%
18.5% is a solid return on sales. Many businesses are satisfied with an RoS in the 5–10% range.