Loading the player...

What is 'Return on Sales (ROS)'

Return on sales (ROS), also known as a firm's operating profit margin, is a ratio used to evaluate a company's operational efficiency.This measure provides insight into how much profit is being produced per dollar of sales. An increasing ROS indicates that a company is growing more efficiently, while a decreasing ROS could signal impending financial troubles.

BREAKING DOWN 'Return on Sales (ROS)'

ROS is a financial ratio that calculates how efficiently a company is generating profits from its top-line revenue. It measures the performance of a company by analyzing the percentage of total revenue that is converted into operating profits. Investors, creditors, and other debt holders rely on this efficiency ratio because it accurately communicates the percentage of operating cash a company makes on its revenue and provides insight into potential dividends, reinvestment potential, and the company's ability to repay debt.

ROS is used to compare current period calculations with calculations from previous periods. This allows a company to conduct trend analyses and compare internal efficiency performance over time. It is also useful to compare one company's ROS percentage with that of a competing company, regardless of scale. The comparison makes it easier to assess the performance of a small company in relation to a Fortune 500 company. However, ROS should only be used to compare companies within the same industry as they vary greatly across industries. A grocery chain, for example, has lower margins and therefore a lower ROS compared to a technology company.

Calculating ROS

The ROS is calculated as a company's operating profit for a specific period divided by its respective net sales: ROS = Operating Profit / Net Sales.  The ROS equation does not account for non-operating activities and expenses, such as taxes and interest expenses.

The calculation shows how effectively a company is producing its core products and services and how its management runs the business. Therefore, ROS is used as an indicator of both efficiency and profitability. For example, a company that generates $100,000 in sales and requires $90,000 in total costs to generate its revenue is less efficient than a company that generates $50,000 in sales but only requires $30,000 in total costs.

ROS is larger if a company's management successfully cuts costs while increasing revenue. Using the same example, the company with $50,000 in sales and $30,000 in costs has a operating profit of $20,000 and a ROS of 40% ($20,000/$50,000). If the company's management team wants to increase efficiency, it can focus on increasing sales while incrementally increasing expenses, or it can focus on decreasing expenses while maintaining or increasing revenue.

RELATED TERMS
  1. Operating Ratio

    The operating ratio shows the efficiency of a company's management ...
  2. Profitability Ratios

    Profitability ratios are a class of financial metrics that are ...
  3. Operating Margin

    Operating margin is a measure of a company's profitability, and ...
  4. Profit

    Profit is the financial benefit realized when the amount of revenue ...
  5. Working Capital Management (WCM)

    Working capital management is the management of short-term assets ...
  6. Net Operating Profit After Tax ...

    Net operating profit after tax is a company's potential cash ...
Related Articles
  1. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  2. Investing

    4 Tips to Evaluate Growth Companies (KO, AAPL)

    Discover the best metrics for stock investors to utilize when selecting and evaluating the best opportunities in growth investing.
  3. Investing

    Key Financial Ratios for Manufacturing Companies

    An investor can utilize these financial ratios to determine whether a manufacturing company is efficient, profitable and a good long-term investment option.
  4. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  5. Investing

    Key Financial Ratios for Retail Companies

    Using the following liquidity, profitability and debt ratios, an investor can gather deeper knowledge of a retail company's short-term and long-term outlook.
  6. Investing

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  7. Investing

    Analyzing Operating Margins

    Learn how to analyze operating margins and how to put this aspect of equity analysis to work.
  8. Investing

    Key Financial Ratios for Pharmaceutical Companies

    Because of the unique requirements for bringing products to market, pharmaceutical industry stocks are best analyzed by using certain key financial ratios.
RELATED FAQS
  1. What is the difference between return on equity and return on capital?

    Learn the difference between ROE and ROC, and how these metrics are calculated and used. Read Answer >>
  2. How should I analyze a company's financial statements?

    Discover how investors and analysts use a company’s financial statements to evaluate a company's financial health and investment ... Read Answer >>
  3. Why are efficiency ratios important to investors?

    Learn about efficiency ratios, such as the asset turnover ratio, and why these metrics are important to investors when analyzing ... Read Answer >>
  4. Is operating profit the same as net income?

    Understand the difference between operating profit and net income, including how each type relates to the other and how both ... Read Answer >>
  5. What are the main income statement ratios?

    Learn how to calculate and interpret some of the most common and insightful financial ratios, like earnings per share, from ... Read Answer >>
  6. How do gross margin and profit margin differ?

    Gross margin and profit margin are profitability ratios used in evaluating a company's financial health, but they have distinct ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center