Calculating Return on Sales
eliza hl
Published Date
Return On Sales, often abbreviated as ROS, is a fundamental financial metric that sheds light on a company's profitability. It’s important because it reflects a company’s efficiency in converting sales into profits
How to Calculate Return on Sales
ROS is calculated by dividing the company's Profit (Net Income) by its total Sales and then multiplying the result by 100 to get a percentage. In simpler terms, ROS represents profit as a percentage of sales revenue.
Return on Sales (ROS)
Look at the 2023 results for Apple Inc.
Divide the Net Income(96,995) by Sales (383,285) and multiply by 100 (to express it as a %). For Apple’s 2023 Results, Return On Sales is 25%.
This means for every dollar Apple made in sales revenue, they kept $0.25 as profit.
(This visual ratio analysis is from our Visual Finance app. If you are interested in learning more about the app, you can watch our visual finance app tour or register for free access to the app.)
What Is a Good Return on Sales?
A high Return On Sales percentage, like the 25% achieved by Apple in September 2023, indicates strong profitability. Most companies typically aim for a Return On Sales of 5-10%, making Apple's 2023 performance particularly noteworthy.
Other companies with noteworthy ROS: In 2023 Google had ROS of 24%, Facebook was 29%, and Microsoft 2023 was a whopping 36%!
What Is a Negative Return on Sales?
In the other direction: 2021 is the last year for Twitter being publicly traded, and they had a negative Return On Sales (-4%).
Twitter had a loss in 2021 so the Return on Sales was also negative.
If you’re unprofitable and losing money, your bottom line will be a negative number and you will have a negative Return On Sales.
Negative Net Income and ROS signifies that a company is operating at a loss (expenses exceed sales revenue); but it does not tell the whole story. If your Gross Margin is positive, increasing sales volume could potentially turn the situation around by covering fixed costs and leading to profitability.
Twitter had a positive Gross Profit (or Gross Margin) in 2021.
However, the Operating Expenses were significant, and the Operating Income was negative. (So was the Net Income at the bottom of the Income Statement!).
In general, businesses need to carefully manage expenses and revenue streams to achieve sustainable profitability.
THE TRIANGLE OF RATIOS
It's important to note that Return On Sales is a single metric. It doesn't provide a complete picture but it does serve as a key component in evaluating overall financial health, especially when considered alongside other metrics such as Asset Turnover and Return On Assets.
These three ratios work together as a triangle, but you must understand each individual term to make sense of the relationship.
Looking at the Income|Outcome business simulation game board, you can see that the Triangle of Ratios actually connects the Income Statement and the Balance Sheet – you need both financial statements for the ‘big picture’.
All employees should understand the concept of Return On Sales. It gives everyone a quick look at how the company is performing and they can use that understanding to make better business decisions.
Instructions
1. Select a Company for analysis (your company, a customer, a competitor, or a company you are considering investing in).
2. Use the Visual Finance App OR locate an annual report for the company and open the Income Statement (and get out a calculator)
The annual report will show financial data for the reporting year and 1 or 2 years previous. Remember it may have a different name:
- Statement of Earnings
- Profit and Loss Statement (P&L)
- Statement of Profit and Loss
- Statement of Operations
- Statement of Comprehensive Income
3.Look at the Return on Sales for each year.
