Return on Sales

A company’s return on sales measures how well it is able to turn sales revenue into profit. It is a useful yardstick of efficiency that can be used to compare companies in a peer group as well as how successful one company is at keeping sales revenue in the business over several accounting periods. To arrive at the return on sales number, analysts measure net sales (sales minus returns, discounts etc) as a percentage of core operating profits (EBIT). Comparing companies that report identical operating profits but where one has achieved its number with significantly lower operating expenses, this company is clearly performing better on the return on sales ratio.