Accounting Tip: Calculate the Return on Sales to See Business Health

By Craig Anthony

0 min read

The return on sales, also called the operating profit margin, is a financial ratio that measures how efficiently a company makes profits from its revenue. The result is a percentage that shows how much revenue is actually converted into profits. It is an important measure that creditors and investors often look at when capital needs to be raised. The formula for return on sales is:Return on sales = operating profits / net salesOperating profit is defined as: Operating revenue – cost of goods sold – operating expenses – depreciation – amortizationFor example, assume a company has $200,000 in operating profits. It sold $700,000 of products and $50,000 worth of product was returned. The return on sales is:$200,000 / ($700,000 – $50,000) = 30.8%

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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