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

You May Also Like


Related pages


finance lease accounting journal entriesaccounting for convertible debenturesnotes receivable sample problemsretail method of estimating inventoryimprest fundsrecording prepaid insurancefob destination prepaidexpanded accounting equation calculatoraccounting tabular analysisjournal entry for sale of inventoryface value of a bond calculatorfreight term fobhow do you calculate total asset turnovercalculate mirrwhat is carriage on purchasesequity multiplier calculatorexamples of bookkeeping spreadsheetspetty cash expense report templatebookkeeping sample testincome statement with cogsexamples of reversing entrieswork out gross profit margindouble entry for debtorstax effect accounting journal entriesreceivables examplesgordon growth model calculatorpv and fv tablesjournal entry for capital accountuneven cash flow calculatorhow to prepare journal entries in accounting150 declining balance depreciation calculatorredemption of bonds payabledeferred taxes definitionconvert margin to markupequation for dividendsexcel pv functiondays sales in receivables ratiolease calculator exceldirect labor efficiency variancepresent value annuity equationaccrual expenseunrealized gain on trading securitiesbookkeeping templates exceldepreciable cost formulaeffective interest amortization tableaccumulated depreciation is what type of accountaccounts receivable turnover ratio formulabookkeeping paper templatebookkeeping trial balancevariable overhead rateincome statement for non profit organization templatewhat does a purchase ledger doassets equals liabilities plus capitalhow to calculate dividends payablefind ending inventorydef sundrydebits and creditsuncollectible accounts expense formulastock turnover days calculationstraight line method depreciation formulabookkeeping abbreviationpresent value annuity charthow to calculate the contribution margin per unitcost of goods manufactured formula accountingequation for dividendsannual nominal rate calculatorifrs bad debt expensecapital lease exampleaccrued income examplesaccounts receivable credit or debit balanceentry for deferred tax assetdeferred tax accounting entrieswhat is scrap value in depreciationaccounts journal entries basicspetty cash book samplepoc calculationexample of unearned revenuecash voucher samplehow to calculate fixed expensesprepaid adjusting entry