A:

Return on sales (ROS) and operating profit margin are often used to describe the same financial ratio. The main difference between each usage lies in the way their respective formulas are usually written. Ultimately, however, investors and analysts can consider ROS and operating margin to be synonymous.

Investors, lenders and analysts use ROS and operating margin to compare companies of different capital structures in different industries. These metrics don't take into account the way businesses get their financing.

EBIT and Operating Income

The standard way of writing the formula for operating margin is operating income divided by net sales. Return on sales is extremely similar, only the numerator is usually written as earnings before interest and taxes (EBIT); the denominator is still net sales.

Most comparisons of operating income and EBIT suggest they are identical. Technically speaking, operating income is an official financial measure according to generally accepted accounting principles (GAAP); EBIT is a non-GAAP measure and does not meet the U.S. Securities and Exchange Commission's (SEC) requirements for financial disclosures.

According to the SEC, operating income should not be considered the most directly comparable measure to EBIT. It instead recommends using net income as presented by GAAP in the statement of operations. EBIT makes room for allowances GAAP doesn't recognize in operating income.

Some measurements of operating income are considered non-GAAP. According to the Financial Accounting Standards Board (FASB), unallowable versions of operating income exclude certain expense and revenue items that are non-recurring.

(For related reading, see "What Ratio Best Reflects Capital Structure?")

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