Return on sales is ratio that is used to estimate company operating performance and efficiency. It indicates how much of each dollar of total revenues is left over after both costs of goods sold (like raw material, wages etc.) and operating expenses are subtracted after paying for cost of production (but before interests and taxes). It is the profit realised from standard business operations and does not include unique or one-off transactions. Return on Sales is very similar to profit margin and it uses almost the same formula, the only difference is that profit margins is always represented as percentage number while return on sales is represented as ratio.
The formula for calculating return on sales:
Return on sales = Operating Earnings / Revenue
The revenue and operating profit can be found on the company’s income statement. Some versions of the formula might use net sales instead of revenue, the difference being that net sales number is adjusted for returns and allowances.
Since return on sales is an efficiency and profitability measure, generally the higher the ratio number the better. An increasing return on sales number will demonstrate that the company is becoming more efficient, and decreasing ratio will indicate that the company is becoming less profitable. Decreasing ROS numbers are not always bad as in some situations, a lowering return on sales can be because the business is using its resources to generate growth, which can be reflected in increased revenue numbers.
|Name||Return on sales||Marketcap||Industry|
|VRSN Verisign Inc||68.3%||$22.99B||Software - Infrastructure|
|V Visa Inc||65.3%||$379.48B||Credit Services|
|CME Cme Group Inc||61.8%||$58.22B||Financial Data & Stock Exchanges|
|ESS Essex Property Trust Inc||56.3%||$13.17B||REIT - Residential|
|MA Mastercard Inc||55.4%||$324.87B||Credit Services|
Return on sales is used by business analyst and investors to analyse a single company’s efficiency over time (to look for trends), as well as to compare companies in the same industries against one another.
Businesses in different industries (with different business models) have very different ROS ratio, so when comparing metrics we should always benchmark agains the relevant industry and business type.