What is Return on Sales?

Also called net operating margin, return on sales can indicate how well a company makes use of its sales revenue.

By dividing Operating Profit by Net Sales, we can arrive at the Return on Sales. Essentially what we’ve done is broken down profits on a per sales basis.

We can see what percentage of sales ends up as profit, or, on the other side of the coin, how much profit is generated per unit of sales. This can be useful for a comparison of companies of different sizes, because it excludes their assets, capital structures, taxes, and interest.

Operating Profit, the numerator in this ratio, is arrived at by taking gross profit and subtracting operating expenses; it is also known as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Sales in this context can mean more than goods sold, but also services rendered or revenue generated from the business’s assets.