ROS stands for return on sales. ROS is an indicator that measures both profitability and efficiency of an enterprise. It shows how much net profit the company has made from sales revenue after all costs and taxes have been reduced. Simply put, it shows how many percent of each lira turned into profit. For example, if a company earns 0.17 USD profit from every 1 USD sale, we can say that the ROS value is 17%.

Return on sales is particularly useful when comparing a company's profitability across different periods. When the value of ROS increases, it is a sign that a company is growing efficiently and its financial condition is improving; when it decreases over time it can mean that a company has some trouble turning income into profit.

The return on sales is found by dividing a company's operating profit by net sales. Since this indicator is always expressed as a percentage, the last step of the calculations is to multiply the result obtained by 100%.

ROS = Operating Profit / Net sales * 100%

Operating profit decreased due to profit from the company's commercial activities, thus gross profit, operating expenses, depreciation. If a company does not have non-operating income (for example, from interest or asset sales), operating profit is equal to EBIT.

Let's think about an A firm, let's make net sales of 200 thousand USD every month, but 170 thousand USD cost is required to get this income. Competitor B's sales are 50 thousand USD, but their costs are much lower - only 35 thousand USD. Which of the two companies has a higher return on sales?

Let's calculate the operating profit of firm A by deducting its costs from net sales:

Operating profit = 200 thousand USD - 170 thousand USD = 30 thousand USD
To get ROS, let's divide this result by net sales:

ROS = 30 thousand USD / 200 thousand USD = 15%

Repeat the above steps for firm B:

Operating profit = 50 thousand USD - 35 thousand USD = 15 thousand USD

ROS = 15 thousand USD / 50 thousand USD = 30%

The sales return for firm A is as high as 15%. The second company has managed to achieve a surprisingly high ROS of 30%. Most businesses are generally satisfied with 5-10% sales returns. According to the analysis of firm A and B, both companies are really profitable. Naturally, to get a complete picture, it is necessary to take a look at the changes in ROS for 2-3 years. In addition, it will be useful in other financial indicators.