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.