# Understanding Return on Sales (ROS) and Its Calculation Formula

## What Is Return on Sales (ROS)?

Return on Sales (ROS) evaluates a company's operational efficiency by assessing how much profit is generated per sales dollar. An increase in ROS signifies improved efficiency, whereas a decrease may indicate financial difficulties. Closely related to the [operating profit margin](https://www.investopedia.com/terms/o/operatingmargin.asp), ROS provides insights into company performance.

### Key Takeaways

*   Return on sales (ROS) measures a company's efficiency in turning sales into profits by dividing operating profit by net sales.  
    
*   ROS is best used to compare companies within the same industry and size due to varying business models and operating margins.  
    
*   Increasing ROS indicates improving efficiency, while decreasing ROS may highlight potential financial challenges.  
    
*   ROS helps conduct trend analysis and compare a company's internal efficiency and performance over time.  
    
*   It is important to note that while ROS is related to operating margin, they differ in formula derivation, particularly in how the numerator is defined.

![Return on Sales](https://www.investopedia.com/thmb/N-KzN7nldRDdYDzGTogi9yw7x08=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Return-on-Sales-v1-3c8286d363db446bb8693e8c1baad957.png)

*— Investopedia / Lara Antal*

## How to Calculate Return on Sales (ROS)

Find the net sales and operating profit on a company's [income statement](https://www.investopedia.com/terms/i/incomestatement.asp), then use the formula below.

$\begin{aligned}&\text{ROS} = \frac{\text{Operating Profit}}{\text{Net Sales}}\\&\textbf{where:}\\&\text{ROS}=\text{Return on sales}\\&\text{Operating Profit is calculated as earnings}\\&\text{before interest, or EBIT.}\end{aligned}$

## Insights Gained from Return on Sales

When calculating return on sales, investors might notice that some companies report net sales while others report revenue. Net sales is total revenue minus the credits or refunds paid to customers for merchandise returns. Net sales will likely be listed for companies in the retail industry, while others will list revenue.

Below are the steps to calculate return on sales:

1.  Locate [net sales](https://www.investopedia.com/terms/n/netsales.asp) on the income statement, but it can also be listed as revenue.
2.  Locate operating profit on the income statement. Be sure not to include non-operating activities and expenses, such as taxes and interest expenses.
3.  Divide operating profit by net sales.

Return on sales is a financial ratio that calculates how efficiently a company is generating profits from its top-line revenue. It measures the performance of a company by analyzing the percentage of total revenue that is converted into operating profits.

The calculation shows how effectively a company is producing its core products and services and how its management runs the business. Therefore, ROS is used as an indicator of both efficiency and profitability. Investors, creditors, and other debt holders rely on this [efficiency ratio](https://www.investopedia.com/terms/e/efficiencyratio.asp) because it accurately communicates the percentage of operating cash a company makes on its revenue and provides insight into potential dividends, reinvestment potential, and the company's ability to repay debt.

ROS is used to compare current period calculations with calculations from previous periods. This allows a company to conduct [trend analyses](https://www.investopedia.com/terms/t/trendanalysis.asp) and compare internal efficiency performance over time. It is also useful to compare one company's ROS percentage with that of a competing company, regardless of scale.

The comparison makes it easier to assess the performance of a small company than a [Fortune 500](https://www.investopedia.com/terms/f/fortune500.asp) company. However, ROS should only be used to compare companies within the same industry as they vary greatly across industries. A grocery chain, for example, has lower margins and therefore a lower ROS compared to a technology company.

Return on sales and operating profit margin are often used to describe a similar financial ratio. The main difference between each usage lies in the way their respective formulas are derived. The standard way of writing the formula for operating margin is operating income divided by net sales. Return on sales is extremely similar except the numerator is usually written as earnings before interest and taxes (EBIT) while the denominator is still net sales.

## Practical Example: Understanding Return on Sales

For example, a company that generates $100,000 in sales and requires $90,000 in total costs to generate its revenue is less efficient than a company that generates $50,000 in sales but only requires $30,000 in total costs.

ROS is larger if a company's management successfully cuts costs while increasing revenue. Using the same example, the company with $50,000 in sales and $30,000 in costs has an operating profit of $20,000 and a ROS of 40% ($20,000 / $50,000). If the company's management team wants to increase efficiency, it can focus on increasing sales while incrementally increasing expenses, or it can focus on decreasing expenses while maintaining or increasing revenue.

## Understanding the Limitations of Return on Sales

Return on sales should only be used to compare companies that operate in the same industry, and ideally among those that have similar business models and annual sales figures. Companies in different industries with wildly different business models have very different operating margins, so comparing them using EBIT in the numerator could be confusing.

Analysts compare sales efficiency across industries using [EBITDA](https://www.investopedia.com/terms/e/ebitda.asp), which removes financing, accounting, and tax effects. For example, by adding back depreciation, the operating margins of big manufacturing firms and heavy industrial companies are more comparable.

EBITDA can stand in for [operating cash flow](https://www.investopedia.com/terms/o/operatingcashflow.asp) because it doesn't count non-cash expenses like depreciation. But EBITDA does not equal cash flow. That’s because it does not adjust for any increase in [working capital](https://www.investopedia.com/terms/w/workingcapital.asp) or account for capital expenditures that are needed to support production and maintain a company’s asset base_—_as operating cash flow does.

## What Can Return on Sales Tell You?

Return on sales is a financial ratio that calculates how efficiently a company is generating profits from its top-line revenue. It measures the performance of a company by analyzing the percentage of total revenue that is converted into operating profits. ROS is used as an indicator of both efficiency and profitability as it shows how effectively a company is producing its core products and services and how its management runs the business.

## What Is the Difference Between ROS and Operating Margin?

Return on sales and operating profit margin are often used to describe a similar financial ratio. The main difference between each usage lies in the way their respective formulas are derived. The standard way of writing the formula for operating margin is operating income divided by net sales. Return on sales is extremely similar except the numerator is usually written as earnings before interest and taxes (EBIT) while the denominator is still net sales.

## What Are the Limitations of Return on Sales?

Return on sales should only be used to compare companies that operate in the same industry, and ideally among those that have similar business models and annual sales figures. A grocery chain, for example, has lower margins and therefore a lower ROS compared to a technology company. Companies in different industries with wildly different business models have very different operating margins, so comparing them using EBIT in the numerator could be confusing.

## The Bottom Line

The return on sales (ROS) ratio is a crucial financial metric that helps assess a company's operational efficiency by indicating how well it turns sales into profits. To calculate ROS, divide operating profit by net sales, focusing on earnings before interest and taxes for an accurate picture.

While a growing ROS suggests enhanced efficiency, varying results across industries highlight its limitations for comparison. Thus, analysts should use ROS alongside other metrics, such as EBITDA, for a holistic evaluation. Consider comparing ROS over time to perform trend analyses and evaluate internal efficiency improvements.