Return on Sales (ROS)

Overview

Return on Sales is a ratio that is used to estimate company operating performance and efficiency. It indicates how much of each dollar of total revenues is left over after both costs of goods sold (like raw materials, wages, etc.) and operating expenses are subtracted after paying for cost of production (but before interest and taxes).

It is the profit realized from standard business operations and does not include unique or one-off transactions. Return on Sales is very similar to profit margin and it uses almost the same formula. The only difference is that profit margin is always represented as a percentage number while return on sales is represented as a ratio.

Formula

Components: The revenue and operating profit can be found on the company's income statement. Some versions of the formula might use net sales instead of revenue, the difference being that net sales number is adjusted for returns and allowances.

Calculation Example

Let's calculate the return on sales for a hypothetical company to demonstrate the process:

How to Interpret

Since return on sales is an efficiency and profitability measure, generally the higher the ratio number, the better. An increasing return on sales number will demonstrate that the company is becoming more efficient. A decreasing ratio will indicate that the company is becoming less profitable.

Decreasing ROS numbers are not always bad, as in some situations, a lowering return on sales can be because the business is using its resources to generate growth, which can be reflected in increased revenue numbers.

General Guidelines:

Why It Matters

Return on sales is used by business analysts and investors to analyze financial performance and operational efficiency in two key ways: for time-series analysis and peer comparison.

Key Insights:

• Efficiency Over Time: ROS is used to analyze a single company's operational efficiency over time, allowing analysts to look for trends. An increasing ROS demonstrates the company is becoming more efficient at converting revenue into operating profit, while a decreasing ROS may signal operational challenges or strategic investments for growth.
• Peer Comparison: Enables comparison of companies in the same industries against one another. By benchmarking ROS against industry peers, investors can identify which companies have superior operational efficiency and cost management within their sector.
• Operating Performance Indicator: Reveals how much of each dollar of revenue is left after covering costs of goods sold and operating expenses. This shows the profit realized from standard business operations, excluding one-off transactions, providing a clear picture of core operational profitability.
• Cost Management Assessment: Changes in ROS over time reveal how well management is controlling costs and managing operations. Improving ROS indicates better cost management or pricing power, while declining ROS may highlight areas needing operational improvement.

Key Takeaways

• Return on Sales is a ratio used to estimate company operating performance and efficiency
• Indicates how much of each dollar of revenue is left after costs of goods sold and operating expenses are subtracted (but before interest and taxes)
• Represents profit realized from standard business operations, excluding unique or one-off transactions
• Very similar to profit margin using almost the same formula—profit margin is represented as percentage while ROS is ratio
• Formula: Return on Sales = Operating Earnings ÷ Revenue (or Net Sales adjusted for returns and allowances)
• Since ROS is efficiency and profitability measure, generally higher ratio number is better
• Increasing ROS demonstrates company becoming more efficient, decreasing ROS indicates becoming less profitable
• Decreasing ROS not always bad—can result from business using resources to generate growth reflected in increased revenue
• Used by business analysts and investors to analyze single company's efficiency over time (looking for trends)
• Also used to compare companies in same industries against one another
• Businesses in different industries with different business models have very different ROS ratios
• When comparing metrics, always benchmark against relevant industry and business type