What is the formula for return on sales (ROS)?
Formula for Calculating the Return on Sales Ratio
The formula for calculating “return on sales” is net income divided net sales or net revenue. Return on sales is similar to the calculation of operating margin, however, net income would includes any income or expense that was excluded from operating income. For example, if net income was $21,000 and net sales was $84,000, then the return on sales would be 25%:
How to Interpret the Return on Sales Ratio
While it is important to be able to calculate the ratio, we need to understand how the ratio can be used to evaluate the operations of a business. Basically, the return on sales ratio tell us how much net income the company generates for every $1 of revenue. So if the return on sales is 25%, then every $1 of revenue means that the company would generate $0.25 of net income.
Comparing Return on Sales Ratio’s Between Companies or Industries
So is a return on sales of 25% good? In order to assess whether the return on sales ratio is good for a company, you should compare the ratio to benchmarks in the industry or ratio’s of comparable companies/competitors. Every industry will have a different ratio. We can also compare the return on sales ratio between companies to see which company generates the highest amount of income for every $1 of revenue generated. In the example below, CyberTech has the highest return on sales of 32.3%, which means they generate more net income per $1 of revenue generated than US Auto and XYZ Insurance.
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