Return on Revenue (ROR)

Definition

The return on revenue (ROR) is a measure of profitability that compares net income of a company to its revenue. This is a financial tool used to measure the profitability performance of a company. Also called net profit margin.

The return on revenue (ROR) is tool for measuring the profitability performance of a company from year to year. This ratio compares the net income and the revenue. The only difference between net income and revenue is the expenses. An increase in ROR is means that the company is generating higher net income with lesser expenses.

This ratio can help the management in controlling the expenses. It can give indications of rising expenses. If a decrease in return on revenue is observed, the management should know that the expenses are not being managed as efficiently as in the past. The management should find out why the expenses are rising and then take steps to reduce them. An increase in the ROR is an indication that the expenses of the company are being facilitated efficiently. These insights can help to see a clearer picture of the expenses and it can help to control expenses.

Calculation (formula)

The return on revenue (ROR) is calculated by dividing the net income by the revenue. This can be expressed in the following formula.

Return on Revenue (ROR) = Net Income / Revenue

Both of these figures can be found in the income statement. Net income is also sometimes referred to as profit after tax.

Norms and Limits

This ratio should be used in conjunction with other financial ratio to see the full picture of a company financial performance and financial position. This ratio tells us only about the financial performance of a company and does not tell us anything about the financial position of a company because it does not take into account the assets and liabilities of a company.