Chapter 6
Return on Sales

Measurement Need

Understanding the amount of profit produced relative to each dollar of sales.

Solutioni*

Return on sales (ROS) is a measure of a company’s ability to generate profits from sales, effectively described as the profit resulting from each dollar of sales. It is represented as follows:

ROS=PnbtS

Where

ROS = return on sales

Pnbt = net profit before tax

S = sales

Our hypothetical company, Global Publishing (from Chapter 4, “Net Profit”), is quite successful. Its business generated $300 million in sales and, from our earlier net profit calculation, it generated $11.5 million in profits. Calculating the return on sales ROS reveals the following:

ROS=$11,500,000$300,000,00=3.8%

The results are low and suggest that Global Publishing needs to figure out how to improve its margins. Conversely, their market characteristics may also suggest that a ROS of 3.8% is reasonable. To understand if their ROS is reasonable given the market, or a signal of under or over performance, marketers must have a broad contextual understanding of the market in which they compete and the relative performance of their main competitors. If their competitors’ ROS is in the 1–2% range, then Global Publishing is performing well.

Impact

ROS is one indicator of the value derived from the firm’s marketing efforts. It is most effectively used when reviewed over time, rather than for a single period, since a larger historical data record can provide greater confidence to business professionals about variations from historical and industry trends. ROS does vary significantly by industry and, at times, within industries. An increase in return on sales may signal improved operational efficiency (i.e., lower expenses). On the other hand, it may reflect a change in a company’s pricing strategy. Therefore, marketers must understand which business levers impacted ROS before drawing conclusions. Higher prices may have led to the increased ROS; but are the increased prices sustainable over the long term? Is the company adding sufficient value to justify the increased price?

In the following example, as Global Publishing grows it may want to focus more on increasing its margins to take advantage of the efforts made to produce its current offerings. To do this, the company needs to know if it can get the same or greater impact from investing in other marketing vehicles that are more cost effective and efficient.

Data for ROS can be found in the income statement since its main components, total sales and net profits before tax, are captured here.

*Note: ROS can also be calculated based on Pnat (net profit after tax). Whether before-tax or after-tax profits are used, the convention should be applied consistently across all return ratios (return on assets, return on equity). The formula is as follows:

ROS=PnatS

For more information, see R. J. Best, Market-Based Management: Strategies for Growing Customer
Value and Profitability (Upper Saddle River, NJ: Pearson Education Inc., 2005), 478.

iAccounting Tools, Return on Sales. Retrieved May 3, 2017 from https://www.accountingtools.com/articles/return-on-sales.html; My Accounting Course, Return on Sales- ROS. Retrieved May 4, 2017 from http://www.myaccountingcourse.com/financial-ratios/return-on-sales; Investopedia. Return on Sales—ROS. Retrieved May 4, 2017 from http://www.investopedia.com/terms/r/ros.asp

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