Calculate and Interpret the Return on Sales Ratio

By Stock Research Pro • October 11th, 2009

The Return on Sales (ROS) ratio, also known as the “operating profit margin”, is used to evaluate the operational efficiency of a company by measuring the management’s competence in its effective use of each sales dollar the company generates. The Return on sales provides an indication as to how well costs are managed and can help investors understand how well the company can handle such adverse conditions as price and sales declines and rising costs.

Calculate the Return on Sales

The formula for return on sales can be written as:

ROS = Net Profit / Sales

The higher the return on sales the better prepared the company is to face competitive price pressures and escalating costs. The measure can also help company management understand the level of profit it generates for each dollar of sales it generates. Observing a company’s return on sales over a number of periods can provide insight as to whether the company is increasing or decreasing its level of efficiency. When evaluating a company for investment, it can be a good idea to compare its return on sales to its industry competitors.

The Average Return on Sales Ratio Can Vary by Industry

A lower return on sales would be expected for those companies that have significant price pressures and rely on a high-transaction model (eg supermarkets). A higher ratio would be expected for companies that operate in industries with higher levels of product differentiation and relatively fewer transactions.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

delicious | digg | reddit | facebook | technorati | stumbleupon | chatintamil

Leave a Comment

You must be logged in to post a comment.

« Calculate and Interpret the Accumulation/Distribution Indicator | Home | What is the Stock Market Calendar Effect? »