Return on Sales Definition with Example
Return on Sales Definition – “A measure of a company’s overall efficiency in generating profits. Also known as net profit margin”.
It is also known as operating profit margin. This ratio shows the company’s operational efficiency to convert revenues into profits.It is one of the financial ratio. Investors are always eager to know this ratio as it tells about the profit made from the revenues earned during certain period of time.
This ratio is used to compare the organization’s performance of more than one year. In addition to this, it is also utilize to compare the company’s belonging to the same industry. It is one of the most important ratio as it compares the performance trends of business for several years.
Return on Sales Formula
ROS = (Operating Profit/ Net Sales)×100
Note – Income tax expense and interest expense does not include in operating profit as they are not operating expenses.
Return on Sales Example
To understand return on sales definition, let’s discuss an example.
XYZ Ltd is a garment manufacturing company which generates 2,00,000 of business every year. The account are showing Rs. 80,000 of profit exclusive of taxes and interests.
ROS = (80,000/2,00,000) ×100
= 0.4 ×100
Related Financial Terms of Return on Sales
Interpretation of Return on Sales
This ratio indicates the efficiency of a company to produce goods and services and their conversion into sales. In addition to this, this ratio also shows the income generated from sales. It is one of the ratio which is both efficiency as well as profitability ratio. According to this ratio, if efficiency and revenues increases, so do the profits.