Rate of Return on Sales (ROS) Calculator
What is the Rate of Return on Sales?
The Rate of Return on Sales (ROS) is a financial ratio that calculates how efficiently a company is generating profits from its top-line revenue. It is frequently referred to as the "Operating Profit Margin." It measures the percentage of revenue that remains after all operating expenses (like wages, raw materials, and rent) have been paid, but before taxes and interest are accounted for.
How to Calculate Return on Sales
To use this calculator, you need two primary figures from your income statement:
- Net Sales: This is the total revenue generated from sales, minus any returns, allowances, or discounts.
- Operating Expenses: These are the costs required to run daily business operations. Note: This should exclude non-operating costs like interest payments and income taxes.
First, determine your Operating Profit by subtracting Operating Expenses from Net Sales. Then, divide that profit by the Net Sales and multiply by 100 to get the percentage.
Real-World Example
Imagine a small manufacturing company that has $200,000 in Net Sales for the quarter. Their costs for materials, labor, and factory rent total $160,000.
1. Operating Profit = $200,000 – $160,000 = $40,000.
2. ROS = ($40,000 / $200,000) × 100 = 20%.
This means for every dollar the company brings in, they keep 20 cents as operating profit.
Why is ROS Important?
Investors and management use ROS to track efficiency over time. An increasing ROS indicates that a company is becoming more efficient, growing its profits faster than its expenses. Conversely, a declining ROS might signal that expenses are rising too quickly or that the company is facing pricing pressure in the market.
Comparing ROS across different industries is difficult because a "good" ROS varies significantly. For example, a software company might have an ROS of 30%, while a grocery store chain might operate successfully with an ROS of just 2% due to high volume.