How does ROS affect profit?

ROS stands for the term 'return on sales' and is described as a measure of how efficiently a company turns sales into profit. This is usually reported as a percentage measurement and this helps to provide an insight into how much profit is being made per £ of sales. If a company’s return on sales is increasing after each time it is calculated this shows the company is being efficient and making more profit, whereas if this figure is decreasing this may show that the company is having financial difficulties.

How to calculate ROS:

Calculating the return on sales percentage is fairly simple. You divide the operating profit by the net sales across a chosen period, followed by dividing the profit figure by the sales figure and multiplying this by 100 to get the return on sales percentage. For example, if your company had £500,000 in sales and £400,000 in expenses in half a year you would subtract the expenses figure from the sales figure leaving you with £100,000 in profit. You would then divide your profit figure by your sales figure giving you 0.2 then multiply this by 100 to equal 20%, making your return on sales percentage 20% for this particular half a year.

How does ROS affect profit?

Calculating and using your return on sales percentage regularly is beneficial to improving your company’s profits. As a company, you should be aiming to reduce costs and boost revenue and using the return on sales percentage can help to assess whether your company is achieving this and can help to identify whether improvements need to be made. If you find your company is failing to reach satisfactory return on sales figures, you will find that your profits will be low and your management should start to think about how to improve things in the business to increase the profits in the future. Regularly calculating and knowing your return on sales percentage is also important as this can be a great figure to present to your stakeholders. If you are presenting a return on sales figure that is increasing across different time periods this is important to show your stakeholders as this could lead to more potential reinvestments helping to grow your business further.