What Is Return on Sales (ROS)?

Return on sales (ROS) is a ratio used to evaluate a company's operational efficiency. This measure provides insight into how much profit is being produced per dollar of sales. An increasing ROS indicates that a company is improving efficiency, while a decreasing ROS could signal impending financial troubles. ROS is closely related to a firm's 澳洲幸运5官方开奖结果体彩网:operating profit margin.

Formula ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚand Calculation of Return on Sales (ROS)

Locate net sales and operating profit from a company's 澳洲幸运5官方开奖结果体彩网:income statement and plug the figures into the formula below:

$\begin{aligned}&\text{ROS} = \frac{\text{Operating Profit}}{\text{Net Sales}}\\&\textbf{where:}\\&\text{ROS}=\text{Return on sales}\\&\text{Operating Profit is calculated as earnings}\\&\text{before interest, or EBIT.}\end{aligned}$​ROS=Net SalesOperating Profit​where:ROS=Return on salesOperating Profit is calculatedℱ as&𒀰nbsp;earningsbefore interest, or EBIT.​

What Return on Sales Can Tell You

When calculating return on sales, investors might notice that some companies report🌠 net sales w⛄hile others report revenue. Net sales is total revenue minus the credits or refunds paid to customers for merchandise returns. Net sales will likely be listed for companies in the retail industry, while others will list revenue.

Belo♏w are the steps to calculate return o🍃n sales:

1. Locate 澳洲幸运5官方开奖结果体彩网:net sales on the income statement, but it can also be listed as revenue.
2. Locate operating profit on the income statement. Be sure not to include non-operating activities and expenses, such as taxes and interest expenses.
3. Divide operating profit by net sales.

Return on sales is a financial ratio th🌄at calculates how efficiently a company is generating profits from🎶 its top-line revenue. It measures the performance of a company by analyzing the percentage of total revenue that is converted into operating profits.

The calculation shows how effectively a company is producing its core products and services and how its management runs the business. Therefore, ROS is used as an indicator of both efficiency and profitability. Investors, creditors, and other debt holders rely on this 澳洲幸运5官方开奖结果体彩网:efficiency ratio because it accurately commun🌳icates the percentage of operatin🃏g cash a company makes on its revenue and provides insight into potential dividends, reinvestment potential, and the company's ability to repay debt.

ROS is used to compare current period calculations with calculations from previous periods. This allows a company to conduct 澳洲幸运5官方开奖结果体彩网:trend analyses and compare internal efficiency performance over time. It is also useful to compare one company's ROS percenta💛ge with that of a competing company, r🤪egardless of scale.

The comparison makes it easier to assess the performance of a small company than a 澳洲幸运5官方开奖结果体彩网:Fortune 500 company. However, ROS shཧould only be used to compare companies within the same industry as they vary greatly across industries. A grocery chain, for example, has lower margins and therefore a lower ROS compared to a techno🌠logy company.

Return on sales and operating profit margin are often used to describe a similar financial ratio. The main difference between each usage lies in the way their respective formulas are derived. The standard way of writing the formula for operatiꦯng margin is operating income divided by net sales. Return on sales is extremely similar except the numerator is usually written as earnings before interest and taxes (EBIT) while the denominator is still net sales.

Example of How to Use Return on Sales

For example, a company that generates $100,000 in sales and requires $90,000 in total cos🍸ts to generate its revenue is less efficient than a company that generates $50,000 in sales but only requires $30,000 in total costs.

ROS is larger if a company's management successfully cuts costs while increasing revenue. Using the same example, the company with $50,000 in sales and $30,000 in costs has an operating profit of $20,000 and a ROS of 40% ($20,000 / $50,000). If the company's management team wants to increase efficiency, it can focus on increasing sales while incrementally increasing expenses, or it can focus on decreasing expenses while maintaining or increasing revenue.

Limitations of Using Return on Sales

Return on sales should only be used to compare companies that operate in the same industry, and ideally among those that have similar business models and annual sales figures. Companies in different industries with wildly different business models have very different operating margins, so comparing them using EBIT in the numerator could be confusin♔g.

To make it easier to compare sales efficiency between different companies and different industries, many analysts use a profitability ratio that eliminates the effects of financing, accounting, and tax policies: earnings before interest, taxes, de🎃preciation, and a🅘mortization (EBITDA). For example, by adding back depreciation, the operating margins of big manufacturing firms and heavy🀅 industrial companies ar🙈e more comparable.

EBITDA is sometimes used as a proxy for 澳洲幸运5官方开奖结果体彩网:operating cash flow, because it excludes non-cash expenses, such as depreciation. But EBITDA does not equal cash flow. That’s because it does not adjust for any increase in 澳洲幸运5官方开奖结果体彩网:working capital or account for capital expenditures that are needed to support production and maintain a company’s asset base—as operating cash flow does.