What does “ROS” mean?
Return on sales (ROS) is a way to determine how profitable and efficient a business is. It looks at earnings before interest and taxes to determine how much running profit a company makes from each dollar of its net sales. Divide the company’s net operating income by its total sales earnings for a specific period to get its return on sales (ROS).
Operating profit margin and return on sales are closely linked. A high ROS (at least 5% to 20%) means the business runs correctly enough to make a lasting profit. A ROS below 5%, on the other hand, means that the company isn’t making enough money from each sale to stay in business in the long run.
To get a higher return on sales, businesses need to focus on getting better results by being more efficient. They can do this by cutting costs, making their pricing plans better, finding new ways to make money that are more profitable, or negotiating better terms with their suppliers and vendors.
Similar words:
- Operating margin, operating profit margin, ROS
- Making money from operations
- The EBIT margin
Why measuring return on sales is important
One of the most critical numbers in business is the return on sales. Increasing profits, or return on sales, means making more money without spending more on getting new customers. This helps companies grow faster and gain a significant market share.
When investors look at a company’s prospects, return on sales is one of the most important things they should consider. It’s often one of the first measures they look at. The next question that comes to mind when a business owner talks about their total sales or income is, “How much of that does the business keep?”
The company can keep more of its income when ROS exceeds its competitors. This means that the company is more profitable. A lower ROS could mean that the business spends too much on marketing or production or has too much debt. For this reason, it’s often a sign of future success for buyers and shareholders.
Profit levels aren’t the only way to tell how valuable a business is. Grocery shops, airlines, and car dealerships are just a few businesses with low returns on sales. For example, Uber’s operating margin was -29% in 2018, -66% in 2022, and -44% in 2023. This means that the company wasn’t “profitable” at all.
Find out how to use return on sales to boost sales.
The return on sales metric is essential, but it’s not very useful unless you want to compare your business to direct competitors of the same size that use similar business methods. Return on sales is best used as an internal metric that companies can use to compare themselves to others. This is because operating profits are only one indicator of future value, and they vary a lot from industry to industry.
The following are some ways businesses can use ROS to boost profitability: Look at internal trends to see how they increase from one year or quarter to the next. Look at current pricing strategies and make changes to make them more profitable.
Reviewing the prices of production, marketing, overhead, and other things to find ways to make things better
Keeping an eye on how the cost of getting a new customer (CAC) changes over time to make sure the business is spending its money well
Finding services or goods that make more money than others
Finding ways to get better deals from sellers or vendors.
It is comparing a company’s performance to that of its main competitors, the averages for its industry, or the best companies in its field.
Company A has a 7% return on its sales. This means the business keeps seven cents of every dollar it makes in net sales. Company A can raise its ROS if it finds and cuts costs related to marketing, production, getting new customers, etc.
Restrictions on How to Measure Return On Sales
Return on sales is a valuable way to determine how profitable and efficient a business is, but it can be wrong sometimes.
Even if a business has a high return on sales, it might not make much money if its sales are low.
Taxes and interest are examples of non-operating costs not considered in the estimate. These can be very important when looking at businesses in different states or international companies in different areas.
A subscription-based business (like SaaS) usually has a higher return on sales (ROS) than a store because they have much lower selling costs, especially if they’re an online business instead of a physical store.
Companies may have a much smaller ROS if they’ve invested a lot of money into long-term projects or initiatives that need a lot of upfront, like research and development (R&D).
A company may have a high return on sales (ROS) because it sets its prices well and has low production costs but may have a low customer retention rate. It’s not a good business model if customers don’t stick around because getting new customers is expensive and doesn’t bring in as much money as repeat sales from current customers.
In their early years, high-growth tech startups often put growth ahead of making money. Much of their profits and investment capital are put back into marketing, new ideas, and hiring new employees. This means that the return on investment (ROS) is low or negative, but these investments aim to speed up growth and gain market share, leading to more significant profits in the long run.
A high ROS may be seen in mature and stable businesses, like utilities and real estate. These areas need a lot of money to get started, but they can make much money with low costs, so the return on investment (ROI) is higher. But because the market is already tiny and because of the way they do business, they can’t grow as much as they’d like to.
How to Figure Out Your Sales Return
To find your return on sales number, do the following:
- On your income account, look for “Net Sales.” This could also be called “revenue.”
- Look for “Operating Profit.” This could also be called “EBIT” (earnings before interest and taxes) or “operating income.”
- To find your return on sales rate, divide your operating profit by your net sales.
- Do the math and multiply by 100.
The formula for return on sales
Here’s how to figure out the return on sales:
(Earnings / Sales) x 100
To show this, let’s go back to Company A. Let’s say that their sales bring in $100,000, and their business costs are $70,000. Their return on sales is 30% because they spend $70,000 in the time it takes to make $100,000.
(30,000 / 100,000) x 100 = 30%
What does it mean when ROS is high?
ROAS shows how successful a company is. The higher the number, the better. If Company B, which is a direct competitor of Company A, makes $60,000 in sales but only spends $15,000 on running its business, it has a 75% return on sales:
(45,000 / 60,000) x 100 = 75%
In this case, Company B makes a lot more money than Company A. Should Company A want to make more money, it might be wise to look at its pricing strategies and running costs.
How much of a gain in sales is good?
A return on sales of 5% to 20% is usually considered good. But because the ROS formula has its limits, there is no clear answer to the question of what is “good.” Operating costs, margins, and return on sales (ROS) vary significantly from one business to the next.
There are still limits in the made-up case above with two director competitors, Company A and Company B. If Company B wants to increase its sales from $5 million to $60 million, that slight difference of $40 thousand could mean spending more on things like marketing, R&D, staffing, and overhead.
This could make Company B’s return on sales a lot worse. There’s no way to know for sure, so companies should focus on improving their ROS gradually over time. If people worry too much about the ROS of another company or an industry standard, they might make bad decisions.
How to Get a Better Return on Your Sales
To make more money, you need to raise your return on sales. Businesses make more money when they run more smoothly, keep customers, and develop better ways to bring in more money.
Here are 12 ways for businesses to get a better return on their sales:
- Work on keeping costs down and getting rid of bills that aren’t necessary, especially those that have to do with overhead.
- Talk to vendors and suppliers about changing their contracts so that they offer more significant price cuts or longer payment terms.
- Use process automation to streamline internal operations and eliminate mistakes made by people.
- To reach price optimization, raise or lower prices or change how prices are set up.
- Use recurring income (if it makes sense) to make money.
- Ask your customers for feedback to determine what parts of your business plan you can change or improve.
- Review your marketing plans again to ensure you’re getting the most for your money, focusing on the right people, and making enough sales.
- Put money into customer service programs like reward programs to keep customers returning.
- 9. Use upselling and cross-selling to make more money from your current customers.
- Look for new ways to sell goods or services that might have higher profit margins than the ones you already have.
- Narrow down your product line so that you only sell high-margin items.
- Keep employees longer to avoid the costs of hiring and training new ones.
