What is Return on Sales
Return on sales is a financial ratio that measures how efficiently the company is generating profit from its revenue by the comparison between operating profit (EBIT) and the net sales. The return on sales shows the percentage of the total profit generated from net sales. In other words, it is the percentage of profit left after all deducted by expenses.
The return on sales (ROS) is used to determine the company’s operational effectiveness of management. To put it simply, it determines the ability of a company to make money through management skills.
The value of return on sales indicates how much profit is being generated per $1 of sales. Thus, the higher return on sales values the higher the company generated profit from sales. For example, a 6% of return on sales means the company receives 6 cents of profit on each dollar of sales.
The higher percentage of ROS reflects the company’s ability to manage its cost. In contrast, a lower percentage of ROS shows the company’s cost management issue.
However, the different industries may have different bases return on sales values, this is the reason why you need to compare the profit margin with rivals in the same industry instead of a random company.
Note: The return on sales is also known as the profit margin and the operating margin.
It is important to understand the concept of return on sales as it is used by various stakeholders of a company (such as investors, lenders, and lenders) because this financial measure reflects how well a company can leverage its efficiency.
Return on Sales Formula
The return on sale can be calculated by dividing the earnings before interest and tax (EBIT) by the net sales, or by the following return on sale formula:
ROS = (EBIT / Net sales) x 100
Where:
- ROS = Return on sales
- EBIT is earnings before interest and tax, also known as the operating profit.
The result or ROS ratio is expressed as a percentage.
Let’s say the Feriors earns $10,000 before interest and tax, and the net sales of the company this year is $50,000:
- ROS = 10,000 / 50,000 = 20%
This means the company makes 20 cents on each dollar of sales, while every 80 cents on each dollar of sales is its cost.
FAQs
The return on sales is a financial ratio that measures the percentage of the total profit generated from net sales after all deducted by expenses. The return on sales is also known as the profit margin and the operating margin.
ROS = (EBIT / Net sales) x 100
The higher percentage of return on sales reflects the company’s ability to manage its cost.
