return on sales

Fin

a company’s operating profit or loss as a percentage of total sales for a given period, typically a year.

Abbr. ROS

EXAMPLE

Return on sales shows how efficiently management uses the sales income, thus reflecting its ability to manage costs and overhead and operate efficiently. It also indicates a firm’s ability to withstand adverse conditions such as falling prices, rising costs, or declining sales. The higher the figure, the better a company is able to endure price wars and falling prices. It is calculated using the basic formula:

Operating profit / total sales × 100 = Percentage return on sales

So, if a company earns $30 on sales of $400, its return on sales is:

30 / 400 = 0.075 × 100 = 7.5%

     Some calculations use operating profit before subtracting interest and taxes; others use after-tax income. Either figure is acceptable as long as ROS comparisons are consistent. Using income before interest and taxes will produce a higher ratio.

     Return on sales has its limits, since it sheds no light on the overall cost of sales or the four factors that contribute to it: materials, labor, production overheads, and administrative and selling overheads.

See also profit margin