Return on Sales

What is the Return on Sales?

The return on sales is the operating profit of the business expressed as a percentage of the revenue. It is a measure of the level of true income a business generates on its sales. It is calculated by dividing operating profit by revenue.

Formula for Return on Sales

The return on sales formula is as follows:

Return on Sales = Operating Profit / Revenue x 100%
  • Operating Profit is found on the income statement.
  • Revenue is also found in the income statement. It may be called Sales or Turnover.

How do you calculate Return on Sales Ratio?

Income statement
Revenue 440,000
Cost of sales 176,000
Gross profit 264,000
Overheads 200,000
Operating profit 64,000
Interest 20,000
Tax 9,000
Net income 35,000

In the example above the operating profit is 64,000 and the revenue is 440,000. The return on sales is given by using the formula Return on Sales = Operating profit / Revenue x 100% = 64,000 / 440,000 = 14.55%.

What does the Return on Sales show?

The return on sales shows how much of the revenue is left after deducting the cost of sales and operating overheads and depreciation.

The return on sales measures the ability of a business to manage its costs and overheads efficiently and to withstand adverse trading conditions.

Useful tips for using the Return on Sales

  • The return on net sales will vary from industry to industry, so it is important to make comparisons to similar businesses in your sector. If your return on sales is substantially different from other businesses within your sector it will need investigation to ascertain why. A low return on sales might indicate that your selling prices are too low or your costs are too high compared to competitors. A much higher return on sales relative to competitors may indicate that you have not fully understood your costings and items have been omitted.
  • The aim is to get the return on net sales as high as possible. This could be achieved by reducing the costs of the product by design or production efficiency, by reducing overheads or by increasing the selling price and sales volume, if the market will permit.
  • One off items should be excluded from both revenue and operating profit, as the return on sales is a measure of the operating performance of the business.
Return on Sales November 6th, 2016Team

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