Key takeaways
- Return on sales equals operating profit divided by net sales revenue.
- It measures operating efficiency, before interest and tax.
- Compare it with your own history and with businesses in the same sector.
- Price, product mix, cost of sales and overheads all move it.
What is return on sales
Return on sales is a ratio that shows how much operating profit a business keeps from its sales revenue. It is also called the operating profit margin.
Because it uses operating profit, it leaves out interest and tax. That makes it a fair way to compare how well two businesses run their day-to-day operations, even when they are financed differently.
What is the return on sales formula
The formula is operating profit divided by net sales revenue. Both figures must cover the same period.
- Return on sales = operating profit divided by net sales revenue
- Operating profit = net sales revenue minus cost of sales minus operating expenses
- Net sales revenue = gross sales minus returns, allowances and discounts
- Some analysts use EBIT (earnings before interest and tax) as the profit figure; say which you use
What does a return on sales calculation look like
A return on sales calculation needs net sales revenue and operating profit for the same period, as in this illustrative example. Fernhill Tools, a made-up equipment supplier, has net sales revenue of £800,000 for the year. Its cost of sales is £480,000 and its operating expenses are £200,000, so operating profit is £120,000.
Return on sales is £120,000 divided by £800,000, which is 0.15. In plain terms, Fernhill keeps fifteen pence of operating profit from every pound of sales. Most reports multiply the ratio by 100 and show it as a percentage.
What is a good return on sales
A good return on sales depends on the industry. A software company and a grocery wholesaler run on very different cost structures, so their ratios are not comparable.
The most useful comparisons are with your own past periods and with businesses in the same sector and of a similar size. A ratio that falls while revenue rises is a warning that growth is costing more than it brings in.
How can you improve return on sales
You improve return on sales by keeping more of each sale. That means raising price, selling more of your higher-margin products, cutting cost of sales or cutting operating expenses.
The sales team has a direct hand in this. Discount discipline, selling to customers who are not expensive to serve and steering deals towards profitable products all lift the ratio without any change to headcount.
How to calculate return on sales, step by step
Use figures from the same period and the same set of accounts.
- Take net sales revenue for the period: gross sales minus returns, allowances and discounts.
- Subtract cost of sales and operating expenses to find operating profit.
- Divide operating profit by net sales revenue.
- Compare the result with earlier periods and with businesses in the same sector.
Where Pebbles Ai fits
Common questions
Is return on sales the same as profit margin?
It is the operating profit margin. Net profit margin is different, because it uses profit after interest and tax.
Can return on sales be negative?
Yes. A negative result means costs were higher than net sales revenue for the period, so the business made an operating loss.
How does return on sales differ from return on investment?
Return on sales compares profit with revenue. Return on investment compares profit with the money put in, so it measures the use of capital rather than operating efficiency.
About this page. Written by the Pebbles Ai team for people who run sales, marketing and growth. Last updated .
