In accounting and finance, return on sales or ROS, is almost always the same as profit margin. Each term refers to a financial profitability ratio that shows the average profit earned on the average dollar of revenue. While there could be small differences based on the specific inputs used, ROS and profit margin can be considered interchangeable figures.
Profit margin and return on sales may also be referred to as "net operating margin" or simply "operating margin." Regardless of the title, this is an essential ratio for management because it points to how effectively business operations generate profit.
Investors often look to ROS and profit margin when comparing businesses in separate industries, something generally not advisable when using other financial ratios. However, ROS and profit margin do not take into account the type of financing a firm employs, meaning without factoring differences in debt and equity spreads into the equation.
Calculating ROS and Profit Margin
Return on sales and profit margin are computed by taking net income, before interest and taxes, and dividing it by sales. Sometimes ROS uses earnings before interest and taxes, or earnings before interest and taxes (EBIT), in the numerator.
The Securities and Exchange Commission, or SEC, cautions against conflating profit margin and return on sales when using EBIT in the numerator in one figure and using operating income in the numerator in the other. The issue centers around the common conception that operating income and EBIT are the same figure. The SEC warns that EBIT, which is not a generally accepted account principle (GAAP) approved measure, makes room for allowances not recognized in the GAAP-friendly operating income.