The Return on Sales Ratio
The Return on Sales Ratio

well in this video we’re going to be talking about the return on sales now the return on sales is actually a type of profitability ratio and if you recall back from our one of our previous videos profitability ratios are designed to try and measure how effective form is at using some of its resources to generate profit profit being that bottom line figure that you see on an income statement so with a return on sales were of course still looking at how effective our firm is at obtaining profit but we’re utilizing a different resource in this case we’re utilizing sales revenue now as you know sales revenue is what a firm earns by selling goods and services so if it were to sell electronics it is the price for each electronic that it sells x the quantity of goods that are sold now that is a top-line figure meaning that we still have to subtract various components to get our bottom-line figure so if you look at on the top we have our revenues which are incoming receipts from the sale of goods and services and then of course we have all of our expenses those things that we need to pay to earn revenue that can include anything from the cost of the goods themselves which are typically called a cost of goods sold or cost of services could include utilities and salaries and other fixed costs that just simply going to operating the business and they can obviously include things like taxes and interest on debt once we factored out those expenses we get our prophet and so what we’re comparing are these two figures here we’re comparing revenue with ultimately this profitability figure here which we commonly call net income which is reflected after all the taxes and interest have been paid so let’s calculate the return on sales and we can kind of run through what you do with this with the figure in how meaningful that particular piece of information is so first off let’s go ahead and use the variables that we have so we have net income of 125 thousand dollars and we have sales revenue of nine hundred thousand dollars now a return on sales which I’m going to abbreviate as ro s in order to get that figure what you need to do is you divide the bottom figure the bottom line figure which is net income by sales revenue and that’s it so it’s very simple so for example we have net income of 125 thousand dollars and we have sales revenue of nine hundred thousand dollars and if you do the math and divide those two figures you actually get . 139 now this particular figure here you can actually convert to a percentage and so you can see into . 139 it’s actually 13.9 percent if you were to convert it into a percentage form so how is this meaningful well what this tells us really is that for every dollar in sales actually translates to roughly 14 cents and profit so for every dollar in sales that we essentially bring in we’re keeping just about fourteen cents in profit after all of the expenses are paid so this is another way to measure really the effectiveness of a company and turning its revenues into some type of profit now again like prior videos i do want to stress that the one soul figure is not going to be significant we want to be able to look at what are the standard return on sales for firms in our industry as well as our competition

6 thoughts on “The Return on Sales Ratio”

  1. Avatar Wan TV says:

    Very educational 🙂

  2. Tek Ghimire says:

    how is net income greater than net sales ????

  3. Chica Visible says:

    Thank you, you save my life 🙂

  4. DontNeedToKnow84 says:

    Why “sales revenue”? If a firm has multiple revenue sources (all aggregated into “revenue”), but you’re trying to figure out earnings relative to the subset of “sales revenue,” you’re going to need a parallel subset of “sales earnings.” Otherwise, I can’t imagine that dividing total earnings against only a subset of revenue is good accounting practice.

  5. PJGdba says:

    How is ROS not Margin? I know ROS is a thing, but I don't know why it is used.

  6. 1 Down 4 Up says:

    Thank you! I’m over my head in my new job and I’m teaching myself to better understand our financial reports.

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