What is Return on Sales?

Return on Sales, Asset Turnover, Return on Assets We put these three together because they relate. Return on sales multiplied by asset turnover equals return on assets. These three ratios hang together as a triangle, but you must understand each individual term to make sense of the whole equation. 

All employees must understand the concept of return on sales. It allows them to grasp how the company is performing and use that understanding to make informed business decisions.

Return on Sales Explained

To begin, we can arrive at the following definition of Return on sales:

Your bottom line profit (or return) as a percentage of your top line (sales). Out of the sales you’ve made, it is the percentage that is your eventual profit after you’ve taken out all the costs and expenses of the business. In other words, it is profit as a percentage of sales.

“Return on sales” refers to the profitability of a business, but “profit” can be deceiving.

People may talk about whether a sale is profitable or not, but they may define “profit” differently. A salesperson may say that their sales are profitable if they sell their product for more than it costs to make it. But they’re not considering all the company’s other costs in this case. 

When you use a precise term like “return on sales,” you’re ensuring that people go down the income statement to the bottom line and see how much profit is left after all expenses are paid.

A formal term like “return on sales” demands a more accurate picture from the speaker. It defines profit as ‘what is left on the very bottom line.’ The term is used mainly by finance departments, but as you can see, its usefulness extends beyond that corner of the company.

What is Return on Sales?

This visual ratio analysis is from our visual finance app. If you are interested in learning more about our visual finance app, you can watch our visual finance app tour or download the app and receive free access.

In this visual ratio analysis of Apple in September 2014, you can see that Apple had a return on sales of about 22%. This means for every dollar Apple made in sales revenue, they kept $0.22 as profit.

How to Calculate Return on Sales

Divide the net income (39,510) by sales (182,795) and multiply by 100%. In Apple’s situation, the result is a rounded total of 22%.

What Is a Good Return on Sales?

Twenty-two percent, by the way, is a remarkably high number. Most companies are happy to get a 5-10% return on sales.

What Is a Negative Return on Sales?

If you’re unprofitable and losing money, your bottom line will be a negative number. So you will have a negative return on sales—but if your gross margin is positive, increasing sales will help the situation. In general, you should manage your accounts to see your turnover and profit clearly.

Building Financial Acumen

Knowing your return on sales is valuable information you can use to inform your decisions. But, many other financial metrics are also essential for decision-making. Knowledge of financial concepts and how they affect a business is crucial to the success of every company. But financial acumen can be challenging to learn and teach.

Income|Outcome finance acumen training teaches key financial concepts to employees at all levels. The finance acumen simulations utilize visual finance through a tangible game board. Participants navigate through real-world situations making decisions and learning from their impact. Our simulations are a great team bonding exercise that delivers the opportunity to upskill your employees. Check out our simulations or contact us if you want to provide value to your team.