Definition: Return On Sales (also known as ROS, Operating Margin, or Operating Profit Margin) is a standardized ratio describing an operation's profits as a percentage of their sales revenue.
The ROS is one of the most widely-used business finance metrics. While it began as an offline metric, it is equally valuable for online businesses.
(Net Profit) / (Sales Revenue) = ROS
Net Profit is generally calculated by taking all sales revenue and then subtracting net operational expenditures, aside from taxes and interest. So an expanded version of the formula would be:
((Sales Revenue) - (Operating Expenses)) / (Sales Revenue) = ROS
The result is a percentage which expresses the basic efficiency of a business, in terms of converting investment into profit. This single percentage then becomes a baseline metric which can be used to judge an operation's performance over the years.
Let's say an online retailer has the following basic budgeting breakdown:
Sales Revenue through all channels: $100,000
Operating Expenses such as website or podcast hosting, content production, and staffing: $70,000
$100,000 - $70,000 = $30,000 in Net Profit.
$30,000 / $100,000 = 0.3, or a 30% Return on Sales. For every dollar spent in expenditures, they are receiving 30 cents in profit.
The figures above do not factor in tax or interest, so real profits may be marginally lower. However, as taxes and interest rates can fluctuate and are almost entirely outside of a business's own control, ROS provides a stable indicator of standalone performance.
Like many business metrics, ROS is most useful in discovering long-term trends over the course of months or years. Because it can be quickly calculated, the ROS is highly valuable in tracking the efficiency of an operation over time.
An increase in ROS doesn't necessarily mean that revenues have to climb - it also reflects operational efficiency. On the other hand, a decreasing ROS may be indicative of poor financial management or waste.
Organizations striving for stability should closely monitor their ROS. With a high Return On Sales, companies can comfortably survive minor economic downturns and sales lapses.
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