Return On Sales Ratio Formula

It is the ratio of Operating Profit to Net Sales or in other words when we divide Operating Profit by Net Sales, then we get Return On Sales or Operating Profit Margin. It shows the efficiency of the Management in utilizing its resources to convert Revenues into profit from business’s operations. It is expressed in percentage like other ratios. It is a Financial Ratio which helps investors and other interested parties to invest in the business if this ratio is good as it is a good sign of company’s management efficiency to convert Revenues into profit from available resources.

Return On Sales Ratio Formula

Mathematically, we can write as follows:

Return On Sales Ratio Formula = Operating Profit / Net Sales

Example

For Example, if Operating Profit is Rs. 100000 and Net Sales is Rs. 500000, then Return On Sales is calculated as shown below:

= 100000 / 500000 = .2 X 100 = 20%

Interpretation / Analysis

It means for Rs. 100000 resources, the company generates Rs. 500000 Returns that are 20 Percent per month.

The higher the ratio is, the higher efficient the management is in utilizing its resources to generates sales from business ’s operations. However, it depends upon the particular type of industry in which the company’s business is operating.

Importance / Significance of Return On Sales Ratio

1. Through this ratio, the performance of one company is compared with other company as with the same resources which company use these in the best way to convert revenue into profit.

2. Investors and other interested parties are interested in this ratio, as it shows the efficiency of management to convert its revenues into profit that is a good sign for the smooth running of the business.