Return on Sales Calculator
The return on sales calculator is a tool that makes it easier to calculate return on sales (ROS). If you wonder what it is, you're in the right place - in this short article, we will explain how to calculate the return on sales and evaluate the result. Additionally, we will provide you with a simple-to-use return on sales formula and illustrate its usefulness with a step-by-step example.
What is the return on sales?
Return on sales is an indicator that measures a company's profitability and efficiency. It tells us how much net profit a company produces from its sales revenue after deducting all the costs and taxes. In simple words, it shows what percentage of each dollar of sales is actual profit. For example, if a company keeps $0.17 out of each dollar of sales, its ROS is at a level of 17%.
Return on sales is beneficial when comparing a company's profitability between different periods. When the value of ROS increases, it is a sign that a company is growing efficiently and its financial condition is improving; when it decreases over time, it may mean that a company has some trouble converting revenue into profit.
Return on sales formula
We calculate the return on sales by dividing a company's operating profit by net sales. As this indicator is always expressed by a percentage, the last step of calculations is multiplying the obtained fraction by 100%.
ROS = operating profit / net sales × 100%
The return on sales formula uses the following variables:
Operating profit - the profit from a company's business operations, so the gross profit is decreased by operating expenses, depreciation, and amortization. If a company doesn't have any non-operating revenue (e.g., from interests or sales of assets), its operating profit is equal to EBIT, as discussed in our ebit calculator.
Net sales - gross sales of a company adjusted by discounts, allowances, or returns.
How to calculate the return on sales?
Imagine a company, "Sports Extreme", that sells sports equipment. It generates $200k in net sales each month but requires $170k in costs to generate this revenue. Its competitor, "Star Active," has sales at the level of $50k, but their costs are much lower - only $35k. Which of the two companies has a higher return on sales?
- Calculate the operating profit of "Sports Extreme" by deducting their costs from the net sales:
operating profit = $200k - $170k = $30k
- Divide this result by the net sales to obtain ROS:
ROS = $30k / $200k × 100 = 15%
- Repeat the steps above for "Star Active":
operating profit = $50k - $35k = $15k
ROS = $15k / $50k × 100 = 30%
- The return on sales for "Sports Extreme" is at a reasonably high level of 15%. The second company, though, managed to achieve an astonishingly high ROS of 30%! Most enterprises out there are usually satisfied with a return on sales at the level of 5-10%; it means that both companies we just analyzed are indeed profitable. Naturally, to have a full picture, it would be highly advisable to look at the changes in ROS over a period of 2-3 years.
Other business indicators
If you are interested in ROS, you may also want to get some information about other business indicators. Take a look at the following:
Return on equity calculator - this is an indicator that measures how well a company reinvested the money invested in it in the form of equity;
Return on assets calculator - it informs us about the profitability of the company in generating profit from its assets;
Return on capital employed calculator - this is a ratio that shows us the efficiency of a company based on the amount of capital it uses.