Return on sales
Return on sales, also known as net profit margin, is a financial ratio that measures a company’s profitability by expressing its net income as a percentage of its total revenue. It shows how much profit a company is able to generate from its sales.
Return on sales is calculated using the following formula:
Return on Sales = Net Income / Total Revenue x 100%
For example, if a company has a net income of $500,000 and total revenue of $2,000,000, its return on sales would be:
Return on Sales = $500,000 / $2,000,000 x 100% = 25%
A return on sales of 25% means that for every dollar of revenue generated, the company is able to keep 25 cents as profit.
Examples of Return on Sales:
- Company A has a net income of $1,000,000 and total revenue of $5,000,000. Its return on sales is 20%.
- Company B has a net income of $2,500,000 and total revenue of $10,000,000. Its return on sales is 25%.
- Company C has a net income of $750,000 and total revenue of $3,500,000. Its return on sales is 21.4%.
Return on sales is an important metric for investors and analysts to assess a company’s financial health and efficiency in generating profits from its sales.
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