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What is Return on Sales (ROS)?
Return on Sales (ROS) is referred to as the number of sales that a company converts into profits. It is a ratio used to evaluate a company’s operational efficiency.
An increasing ROS represents efficient growth of a company while a decreasing ROS could represent impending financial trouble for the company.
ROS can be of great help to the investors and creditors interested in a company as it indicates the percentage of money that the company actually makes on its revenues in a given time period.
They can analyze this information and compare one company’s performance to another and establish which of the two could be a better investment opportunity.
How to Calculate ROS?
ROS can be calculated by dividing the operating profit – before deduction of taxes, etc, – by the total sales, across a time period.
Return on Sales = Operating Profit / Net Sales
For example, if your company makes $500,000 in sales but incurs total operating expenses of $430,000. In this case, the operating profit comes out to be $70,000.
Next, we divide this operating profit by the net sales to get ROS which comes out as 0.14. Converting this into a percentage by multiplying 100 we get a ROS of 14%. Not bad at all! Any ROS above 10% is considered an extremely good performance by the company.
How to use Return on Sales?
Companies can analyze ROS and can react accordingly to boost this ratio. They need to act swiftly and make smart decisions to have a positive impact on ROS.
A company that generated $200,000 in sales while incurring expenses of $180,000 is considered to be less efficient than another company generating $100,000 in sales while incurring expenses of $60,000.
For any business to enhance its ROS percentage, managers should work out ways to increase their revenue by keeping the expenses within permissible limits or decrease the expenses without significantly disturbing the revenue generated.
The management should make sure that a balance is reached between the net sales and the net operating expenses so as to always maintain the ROS within satisfactory levels.
Q: What is the difference between Return on Sales and Operating Margin?
A: Operating margin is operating income divided by net sales. Return on Sales is somewhat similar to this except that the numerator is written as earnings before taxes and interest while the denominator is still net sales.
Q: What is considered a good Return on Sales?
A: Most of the companies feel contempt with a Return on Sales of around 5-10%.
Q: How can you improve Return on Sales?
A: There can be multiple ways to improve ROS for a business. The most obvious one is to increase the prices of the product as long as the price is still comparable with their competitors and does not hamper their sales too much. The second could be to try and get the raw materials required for their product at a cheaper price. This would decrease their expenses, i.e., the denominator in the calculation of ROS hence increasing the overall ratio. Apart from this, the companies could also analyze geographical locations where they feel a bit more effort could result in a significant rise in sales, hence increasing the ROS.