A profitability ratio that relates profits to sales. In equity form, it is measured as:
Net income is the bottom line of a company’s activity, and sales revenues represent the first step towards that end (actually, on the income statement, the latter is shown on the first line, whereas the former literally comes at the last line). Therefore, this ratio presents a percentage of the last line to the first line). Analytically, this ratio measures how much of every dollar of sales is reported as profit. For example, the income statement of a given company shows $50,0000 and $750,000 in net income and sales, respectively. Then, its return on sales is:
ROS = 50,000/ 750,000 = 6.67%
This indicates that the company is producing more than 6 cents in profits from every dollar of sales.
This ratio is also known as profit margin (PM).
Comments