Return on Sales Formula: How to Calculate Return on Sales

Return on sales is a financial ratio that measures the amount of profit a company generates on a sale compared to the expenses or operating costs during the same period. Other common terms for ROS include operating profit margin or efficiency ratio.

A higher return on sales ratio is desirable as it signals greater operational efficiency. A decreasing ROS could be a sign of financial weakness. Companies list their ROS on their income statement. This financial statement details a company’s total revenue, expenses, and losses over a specific period to show the company’s net profit (or net loss).

Return on sales is an important measurement tool for investors and creditors because it is a profitability indicator, which can also influence a company’s stock price. Investors can use this financial ratio to judge business operations and reinvestment potential.

The ratio has many applications in the business world: Businesses often use return on sales as a comparison tool to evaluate a company’s quarterly or annual performance or to compare how different companies, even in different industries, are performing in relation to each other.

To calculate return on sale, divide your company's earnings before interest and taxes (EBIT) by its net sales revenue (total sales) per the following return on sales formula: Return on Sales = EBIT ÷ Net Sales Revenue. Non-operating activities and non-operating factors, such as taxes and financing structure, do not factor into this financial ratio. In addition, return on sales does not include income tax expense or interest expense, as they are not operating expenses.

Return on sales and profit margin (for example, gross profit margin or net profit margin) are corporate finance ratios that can shed light on financial statements, but they do so in different ways. Return on sales is a financial ratio that calculates how efficiently a company turns revenue into profit. The ROS formula divides earnings before interest and taxes (EBIT) by net sales revenue, while the profit margin formula divides operating income by sales.

While the ROS ratio is a good indicator of a company's profitability, EBIT is not a generally accepted accounting principle (GAAP). This set of principles establishes consistent standards and procedures for accountants in the United States, governing areas such as revenue recognition, matching principles, going concern, accrual, and disclosure. Conversely, operating income, which includes depreciation, is a GAAP method of accounting.

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