Return On Sales (ROS)

Profitability ratios Print Email

Definition

Return on sales (ROS) is a ratio widely used to evaluate an entity's operating performance. It is also known as "operating profit margin" or "operating margin". ROS indicates how much profit an entity makes after paying for variable costs of production such as wages, raw materials, etc. (but before interest and tax). It is the return achieved from standard operations and does not include unique or one off transactions. ROS is usually expressed as a percentage of sales (revenue).

Return on sales (operating margin) can be used both as a tool to analyze a single company's performance against its past performance, and to compare similar companies' performances against one another. The ratio varies widely by industry but is useful for comparing different companies in the same business. As with many ratios, it is best to compare a company's ROS over time to look for trends, and compare it to other companies in the industry. An increasing ROS indicates the company is becoming more efficient, while a decreasing ratio could signal looming financial troubles. Though, in some instances, a low return on sales can be offset by increased sales.

Calculation (formula)

Calculations of ROS commonly use operating profit before deducting interest and tax (EBIT); using income after-tax is less common.

Return on sales (operating margin)= EBIT / Revenue

Exact Formula in the ReadyRatios Analytic Software

ROS = EBIT / F2[Revenue]

F2 – Statement of comprehensive income (IFRS).

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