Return on sales lets you know your " profit" per dollar of sales. If a business has a high return on sales, this is good and means that their operational efficiency is high.
On the other hand,. If the return on sales is low then the company will need to see how they can improve their operational efficiency.
Investors will have to conduct further investigation and assess the risks before investing into a company with a low return on sales as this shows the company is not functioning efficiently and may end up in financial trouble.
In addition to this, by looking at the return on sales you can track how the business has been performing over a period of time.
This is useful because you can track when a company is doing well and being efficient and when it is not.
Return on sales is also useful to compare other similar businesses to see how they are operating in the same industry.
Return on sales = operating profit / net sales.
These numbers can easily be found by a business in their financial statements.
By viewing a business's income statements it is simple to locate the figures you need to calculate the return on sales.
The first step when finding these is to locate the operating profits and the company's net sales.
In order to calculate the businesses net sales you will need to use the companies revenues and deduct and refund, credits or discounts.
For example, although it is useful to compare companies within the same industry this is not the case for businesses in different industries.
Different industries will have a different return on sales, so where in one industry the return on sales may seem great this would not be the same for a different industry.
Return on sales should only be used to compare businesses in the same industry and the same business model.
On the other hand, the return on investment calculates how much a specific investment at a specific cost will return back.
In order to calculate the operating profit you will need to take the operating income and divide it by the net sales.
An example of this is that one company may have a return on sales of 40% which looks to be a very good return on sales however when you take a look at another company in the same industry who has a return on sales of 70% , it is then you will be able to see that the first company is not in fact doing as well as its competitors.
A businesses main objective is to reduce spending and increase the profit through improvements made after assessing the return on sales.
If it is found that the profits are low, the company should investigate further to see what the cause of this is and how they can improve this.
Hopefully after making these changes the return on sales will increase and the spending will decrease.
If a businesses return on sales is increasing then this is a positive trend showing that the company is generating profits.
It also indicates that the business is being run efficiently and has more sales dollars and is being turned into profits.
However, if a company's return on sale is decreasing this is a bad sign for the business that it is not being run efficiently and is not generating good or any profit.