What is an After-Tax Return On Sales
After-tax return on sales is a profitability measure that indicates how well a company uses its sales revenue. To calculate after-tax return on sales, divide the company's after-tax net income by its total sales revenue. The resulting figure, multiplied by 100, will be a percentage; the higher the percentage, the more efficiently the company uses its sales revenue.
BREAKING DOWN After-Tax Return On Sales
Profitability ratios like after-tax return on sales and after-tax return on assets are useful for comparing different companies within the same industry. However, because profit-margin standards can vary widely by industry, it would not make sense to compare the after-tax return on sales of an automobile manufacturer to that of a clothing store. In addition, a single profitability ratio only provides a small piece of the overall picture of a company's financial performance, and investors should use a number of ratios to develop an accurate analysis of the company’s performance.
Financial Metrics and After-Tax Return on Sales
Investors use a variety of financial metrics in order to evaluate the performance of a private company, including after-tax return on sales. There is no one financial metric that can tell whether a company is successful or not, because different industries have different cost structures and competition levels.
Companies that show higher levels of after-tax return on sales tend to be in industries with higher profit margins and lower tax levels. Profit margin is the share of every dollar of a company’s revenue that gets booked as a profit, instead of spent as an expense. Industries with less competition tend to have lower profit margins, because there are fewer companies fighting over the same level of customer demand. With greater levels of competition, the greater the pressure to lower prices.
Taxes are another important factor in after-tax return on sales. In jurisdictions with higher taxes, after-tax return on sales will be lower, because the metric takes into account how much a company must pay the government in taxes.
Industries and After-Tax Return on Sales
Investors expect a different level of after-tax return on sales depending on the industry in which a company is involved. Within the S&P 500, pharmaceutical and biotechnology companies tend to have a higher after-tax return on sales, followed by energy and exploration firms and software and software-related services. In the United States, consumer staples companies, which sell essential products like those provided by supermarkets, tend to have the lowest after-tax returns on sales.