A:

Gross sales demonstrate the amount of business activity undertaken by a company but do not reveal how much revenue was generated or how profitable the business is. This figure does not exclude funds that were issued as refunds, discounts given to customers and costs of doing business. This amount, in other words, may be significantly larger than net sales, revenue and profit totals. Net sales is the gross sales figure with customer discounts and refunds subtracted from it. High gross sales and net sales do not necessarily mean a company is profitable.

Retail businesses have operating expenses that must be paid with revenue generated from sales activity. A high gross sales figure indicates significant business activity with many products sold or products sold at a high price. The higher the gross sales, the larger the retail operation is likely to be. Investors should consider the fact that this business activity may or may not be profitable, however. After operating expenses are subtracted from revenue, the profit may be small or even nonexistent if operating expenses are high.

Profitable retail businesses have a higher net sales figure than total operating expenses. Business owners and investors can use an operating expense ratio calculation to determine the profitability of a retail business by dividing operating expenses by total net sales. For example, an operating expense ratio of 0.75 means the company spends 75 cents for every $1 of revenue and makes 25 cents of profit. To increase profitability, net sales must increase and operating expenses must remain the same or decrease.

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