Return on Sales

What is Return on Sales Ratio?

Return on Sales is a financial ratio that shows how efficiently a company is able to generate operating profit from its revenue. It is used to measure the performance of the company by analyzing what percentage of the revenue eventually results in profit for the company rather than being spent towards paying the company’s operating cost.

How to Calculate Return On Sales?

The calculation of return on sales ratio is done by dividing the operating profit by the net sales for the period, and it is mathematically represented as,Return on Sales = Operating profit / Net sales * 100%

It is to be ensured that the operating profit does not include any of the non-operating income or expenses such as income tax, interest expense, etc.

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For eg:
Source: Return on Sales (wallstreetmojo.com)

The following five simple steps can be used to the calculation of return on sales of a company:

  1. Firstly, collect operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more such as rent, equipment, inventory costs, marketing, etc. from the income statementThe Income StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more.

  2. Next, collect net sales also from the income statement.

  3. Now, subtract the operating expenses from the net sales to find the operating profit of the company.

    Operating profit = Net sales – Operating expense.

  4. Now, divide the operating profit by the net sales to find the portion of each dollar the company keeps as profit.

  5. Finally, multiply the above result by 100% for the calculation of return on sales ratio as a percentage.

    Return on Sales = Operating profit / Net sales * 100%

Examples of Return on Sales Ratio

Let us consider an example of the calculation of return on sales ratio for a company called PQR Limited. PQR Limited is in the business of manufacturing customized roller skates for both professional and amateur skaters. At the end of the financial year 20XX, QPR Limited has earned $150,000 in total net sales along with the corresponding expenses.

  • Net sales:                     (+) $150,000
  • Salaries:                        (-) $50,000
  • Rent:                            (-) $20,000
  • Interest expense:          (-) $10,000
  • Depreciation expense: (-) $25,000
  • Taxes:                           (-)  $4,000
  • Net income:                        $41,000

Based on the given information, the operating profit of PQR Limited at the end of the financial year 20XX can be calculated as,

Operating profit = Net sales – Salaries – Rent – Depreciation expense

return on sales example

[Interest expense and Taxes not included as these are non-operating expenses]

The calculation of Return on Sales Formula can be done as,

Return on sales =Operating profit / Net sales * 100%

return on sales example 1

Therefore, the Return on Sales Ratio of the company for the year 20XX stood at 36.67

Relevance and Uses

This article has been a guide to what is Return on Sales. Here we discuss Return on Sales calculation using its formula (Operating Profit/Net Sales) along with practical examples. You may also have a look at the following financial analysis articles –

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