Ros normative value. How to calculate return on sales: basic concepts, formulas and their application. These indicators can be obtained in two ways
Any sales are carried out to achieve the same goal - making financial profit. But it is impossible to give an objective assessment of sales effectiveness without an indicator of their profitability.
What is profitability?
Return on sales, also known as the return on sales ratio, is a percentage expression of the share of profit from each ruble earned. In other words, return on sales is the ratio net income to the amount of revenue from sales of products, multiplied by one hundred percent.
Some entrepreneurs are misled into thinking that return on sales shows profitability relative to the money invested. It is not right. The return on sales ratio allows you to determine what amount of money in the volume of products sold is the profit of the enterprise minus taxes and related payments.
This profitability indicator shows profitability solely from the sales process itself. That is How much does the cost of the product pay for the costs of the production process of the product/service? (purchase of necessary components, use of energy and human resources, etc.).
When calculating the coefficient, such an indicator as the volume of capital (volume working capital). Thanks to this, you can safely analyze the profitability of sales of competing enterprises in your segment.
What does return on sales show an entrepreneur?
- The return on sales ratio allows you to characterize the most important thing for a company or enterprise - the sale of main products . In addition, the share of cost in the sales process is assessed.
- Knowing the profitability of sales, the company can control pricing policy and costs . It is worth noting that different companies produce goods through different strategies and techniques, which causes differences in profitability ratios. But even if two companies have the same revenue, operating expenses, and pre-tax profits, their return on sales will differ. This is due to the direct impact of the amount of interest payments on the total net profit.
- Return on sales is not a reflection of the planned effect of long-term investments . The bottom line is that if a company decides to change its technological scheme or purchase innovative equipment, then this coefficient may decrease slightly. But it will regain its positions and surpass them if the modernization strategy was chosen correctly. By the way, if you want to improve your profitability, read the article “increasing profitability of sales.”
How to calculate return on sales?
To calculate the return on sales ratio, the following formula is used:
ROS– the English abbreviation Return on Sales, which translated into Russian actually means the required profitability ratio, presented as a percentage;
NI– English abbreviation Net Income, an indicator of net profit expressed in monetary terms;
N.S.– English abbreviation Net Sales, the amount of profit received from the sale of manufactured products, expressed in monetary terms.
Correct initial data and dry calculations will allow you to determine the real profitability of sales. The formula for return on sales is simple - the resulting result is an indicator of production efficiency.
An illustrative example of calculating profitability:
Unfortunately, the general formula for return on sales can only show the efficiency or inefficiency of a company, but does not answer the problem areas of the business.
Suppose, after analyzing profitability data for 2 years, the company received the following figures:
In 2011, the company earned a profit of $2.24 million; in 2012, this figure increased to $2.62 million. Net profit in 2011 was $494 thousand, and in 2012 – $516 thousand. What changes did the profitability of sales undergo in 2012?
The profitability ratio for 2011 is equal to:
ROS2011 = 594 / 2240 = 0.2205 or 22%.
The profitability ratio for 2012 is:
ROS2012 = 516 / 2620 = 0.1947 or 19.5%.
Let's calculate the final change in profitability of sales:
ROS = ROS2012 – ROS2011 = 22 – 19.5 = -2.5%.
In 2012, the company's sales profitability decreased by 2.5%.
Here you can see that profitability decreased by 2.5% over 2 years, but the reasons are not clear until a more detailed analysis is carried out. It includes:
- Examine changes in tax costs and deductions that are required to calculate in NI.
- Calculation of profitability of a product/service. Formula:
Profitability = (revenue - cost * - costs)/revenue * 100%
- Profitability of each sales manager. Formula:
Profitability = (revenue - salary * - taxes)/revenue * 100%.
- Advertising profitability of a product/service. Formula:
*If you provide services, then the cost includes: organization of the workplace for sales managers (computer equipment, rent of sq.m., telephone equipment, utility bills proportional to the person, etc.), their salary, telephone costs, advertising, costs for the necessary software (CRM, 1C, etc.), payments for a virtual PBX.
Let us immediately note that it is possible to use a simpler formula for return on sales: ROS = GP (gross profit) / NS (total revenue). But it is more appropriate for calculating “narrow” indicators (profitability for each manager, for a specific product, for a page on a website, etc.).
It is important to note that each manager may have a different sales structure: some sell only expensive goods and rarely, some sell small ones, but often - this is where the main difficulty will be in calculating net profit (margin after taxes). It is necessary to resort to the margin data of each product for each seller using CRM.
- Calculation of sales volumes and margins. Perhaps profitability has fallen because... the most marginal product ceased to be sold.
| Selling a site | Selling contextual advertising | |
|---|---|---|
| Profitability by formula | (500 thousand – 135 thousand – 90 thousand for taxes)/500 thousand = 55% | (900 thousand – 600 thousand – 162 thousand for taxes)/900 thousand = 15% |
| Sales volume per month | 500 thousand rubles (cost of 5 sites) | 900 thousand rubles (cost of 3 projects) |
| Material costs | 15 thousand rubles. (purchase of a domain, payment for software, advertising, etc.) | 600 thousand rubles (money given to advertising services, etc.) |
| Labor costs | 120 thousand rubles. (salary for at least 3 employees) | 40 thousand rubles. (salary for 1 employee) |
We said above that part of increasing profitability of sales is reducing costs and expenses. But at the same time, we recommend that you be careful with this point because... Negative consequences may follow in the form of deterioration in the quality of goods (services) and a decrease in the efficiency of specialists. To avoid this, it is necessary to approach the issue of increasing sales profitability in a comprehensive manner! It includes studying: The table shows that, despite the fact that contextual advertising brought more money to the company’s bank account, its profitability is 3.7 times lower. This means that if managers sell websites poorly, but well contextual advertising– this means that a decrease in profitability cannot be avoided.
- Competitors
- Sales and Cost Structures
- Sales channels
- CRM uses
- Managers' effectiveness
After studying all this, you can move on to developing sales tactics and strategies. And only now make operational decisions.
The completed data shows that it is possible to increase the costs of the offices page because they provide the greatest profitability for the business.
Calculating profitability for all layers is quite a labor-intensive task, especially if you have not done this before, and analysis is required over several months or even years (more than one week). And still, in the end, you may get an answer to the question “where are the strongest and weakest points,” but not understand what and how to do next. Therefore, we offer you our assistance in collecting, analyzing, developing recommendations, executing and monitoring the optimization of the sales department to increase business profitability.
The profitability ratio is the ratio of the net profit (after payment of all taxes and interest) of an enterprise to the total amount of sales, i.e., to revenue. It reflects the efficiency of the organization, its financial results and shows how much Money of the proceeds from sales is profit. The value of the indicator must be above zero, which means that the company is profitable. Otherwise, it is unprofitable. For the calculation, data from the income statement are used.
The purpose of any activity commercial organization- Receiving a profit. It depends on its size further development enterprise, its financial stability. Company management, when analyzing operating results, uses different ratios, including profitability indicators, which give an idea of how much profit is received on the amount of invested funds, equity capital, total assets or revenue.
Determination of the coefficient
The profitability ratio (return on sales - ROS) shows what percentage of profit is contained in the total revenue of the enterprise. This relative indicator is used by management, investors and creditors to analyze the company's business activity and its performance.
Why is the profitability ratio calculated?
The ROS value allows you to evaluate:
- level of business activity;
- share of profit in revenue volume;
- risks of increasing production costs;
- overall efficiency of the enterprise.
The indicator is calculated for both internal and external use. With its help, the company’s management decides on the need to reduce costs, commercial, administrative or other expenses. Investors and lenders evaluate the degree of profitability and the margin of financial strength.
Important! For company management, investors and creditors, what is important is not the sales volume itself, but how much net cash is received from these sales.
Normative value
ROS should be above 0. If this is not the case, then the management of the enterprise is ineffective and it incurs losses. The standard values of this indicator depend on the industry:
- Agriculture - 9%;
- retail trade - 2.2%;
- real estate transactions - 5.7%.
- oil and gas production - 4.1%;
- food production - 1.5%;
- construction of buildings - 1.1%.
Reference! There are no strict ROS standards. These are only the average values for industries for the year, collected by Rosstat based on the results of an analysis of activities Russian companies.
You can view the full list of average values by downloading the Excel file.
In general, an enterprise is considered:
- low-profit if ROS is in the range of 1-5%;
- averagely profitable with ROS from 5% to 20%;
- highly profitable if the indicator is 20-30%;
- super profitable if the value exceeds 30%.
About efficiency economic activity can be judged by analyzing the indicator over time. Its increase indicates high sales efficiency and reduced production costs.
Calculation procedure
The indicator is calculated using the formula:
where PE is net profit, i.e. the profit remaining after paying interest and taxes;
B - revenue from sales of products.
Important! This formula is used exclusively for Russian financial statements. In Western practice, ROS is calculated not by net profit, but by earnings before taxes (EBIT).
The values of the indicators are taken for the same period, usually a year. Several coefficients are calculated, ideally over 5 years, to assess the dynamics.
Formula for accounting forms
To calculate the ROS indicator, data from the income statement is used.
where page 2400 of the report on f. R. - the value of line 2400 of the financial results report;
page 2110 of the report on f. R. - the value of line 2110 of the financial results statement.
ROS belongs to the group of profitability ratios:
- EBIT return on sales - the ratio of profit before tax to sales volume;
- return on assets (ROA) - PE divided by the assets of the enterprise;
- product profitability - the ratio of EBIT to cost of goods sold;
- return on equity (ROE) - characterizes the ratio of private equity to the amount of equity capital.
Calculation example
As an example, let’s calculate the profitability ratio of PJSC LUKOIL for the last three years using Russian and Western financial analysis systems.
Data source: official website of PJSC LUKOIL
As the calculation showed, the value of the coefficient over the past years is significantly higher than all standard values. PJSC LUKOIL is a highly profitable enterprise. In 2015, the profitability ratio exceeded 100%, which indicates that the company has significant income from other activities not related to the sale of products. In this case, the drop in the coefficient in 2016 does not play a significant role, since its value is extremely high, and the increase in next year indicates that the difficulties encountered were temporary.
You can download a table with calculations of the profitability ratio (ROS) in a convenient format -
Return On Sales (ROS) is an indicator of sales efficiency and a tool for controlling prices and costs. There are several formulas for calculating ROS. Read on to find out which formula to choose and how to analyze the data obtained. And also download a report that will help you control your sales profitability.
What is return on sales
Formula for return on sales based on net profit
The most common way to calculate return on sales is by net profit (ROS).
Net Sales – revenue from product sales minus indirect taxes (VAT and excise duty) for the same period.
However, when calculating, instead of net profit, you can use:
- gross margin (sometimes separated into a separate indicator - marginal profitability);
- operating profit;
- earnings before interest and taxes (EBIT);
- profit before taxes.
The choice of numerator depends on the availability and complexity of obtaining data, the tax burden, and the purposes of the analysis.
How to calculate operating return on sales based on net profit
Operating return on sales based on net profit allows you to evaluate the effectiveness of the company's core activities. It is determined by the formula:
where R N is the operating return on sales based on net profit,
NPS – net profit from sales,
TR – Revenue.
Return on sales formula on balance sheet
RP = line 2200 / line 2110,
where RP is return on sales,
line 2200 – profit (loss) from sales,
line 2110 – sales revenue.
In this case, return on sales shows the share of profit from sales in the company's revenue.
Economic essence and normative significance of the indicator
The return on sales ratio shows the share of profit in each ruble of revenue; it allows you to evaluate the effectiveness of sales and understand how much profit each ruble of revenue will bring.
There are no generally accepted standards for the value of the indicator. You can rely on industry standards or the performance of competitors or similar businesses. The company's top management must independently determine the necessary standards, permissible deviations and response schemes for exceeding permissible deviations.
Excel model that will calculate projected return on sales in 15 minutes
If a company plans to include a new product in its assortment, estimate the projected profitability of its sales using a ready-made model in Excel. Experts at System Financial Director have developed a model and material that will tell you how to work with this model and how to adapt it to your needs.
Application practice
The indicator is used to analyze companies for comparison with competitors or over time, to compare individual products or product groups, divisions, sales channels (see more about ).
Analysis of profitability of sales for the company as a whole
If we compare organizations of similar business scale, then the rule is true for them: the lower the share of profit in revenue and, accordingly, the ROS value, the worse the business is doing in comparison with its competitor, since revenue contains relatively more expenses.
Analysis of the indicator for the purposes of assortment policy
Determining profitability for the company as a whole may show an unfavorable picture, but will not give a complete answer about the necessary actions; a more in-depth study will be required. Comprehensive information about the reasons for inefficiency will allow you to obtain an analysis in the context of products, product groups and directions.
Analysis for pricing purposes
Analysis of the indicator by product provides the information necessary to adjust prices. There is also an additional effect that affects ROS - the effect of scale. As sales grow, overhead costs are distributed over a larger number of units of goods, which in turn increases ROS by product, product group and operational area. The share of overhead costs decreases, since overhead costs do not change following the growth of sales, while revenue grows, therefore, the value of profitability for the company also increases.
Example of calculation and analysis
Let’s assume that in 2015 the organization made a profit of 10 million rubles, in 2016 the profit decreased to 8 million. At the same time, revenue in 2015 amounted to 120 million rubles, and in 2016 – 110 million rubles. Let's define ROS for two years in Table 1.
Table 1. Calculation of ROS for 2 years
At the end of 2016, ROS decreased by 8.3 - 7.27 = 1.03%, while profit fell by 20%, and revenue by only 8.3%, which indicates an increase in costs for the company as a whole. We noted a deterioration in the result, this is a reason to conduct a more in-depth study and look at ROS by product (Table 2).
table 2. ROS by product
|
Product "A" |
Change |
||
|---|---|---|---|
|
Profit, million rubles |
|||
|
Revenue, million rubles |
|||
|
Share in company profits |
|||
|
Share in company revenue |
|
Product "B" |
Changes |
||
|---|---|---|---|
|
Profit, million rubles |
|||
|
Revenue, million rubles |
|||
|
Share in company profits |
|||
|
Share in company revenue |
A very interesting situation: product “A” - revenue does not change, but profit falls, which leads to a fall in ROS. This is possible if the product is in the “maturity” stage and more and more promotional expenses are required to maintain sales, especially in a situation of unfavorable market conditions.
Product “B” shows a different trend - we received a large decrease in the absolute values of both profit and revenue, but at the same time ROS is growing. The reason is proportional: profits fell less than revenue. Probably, despite the drop in sales, the company managed to optimize its costs, for example, the product is new for the company and the “training” effect is having an effect.
A high share of product “A” in revenue gives us a paradoxical result for the organization as a whole: a decrease in profitability for product “A” by 0.5%, while an increase in product “B” results in a decrease in ROS as a whole by 1%.
In practice, you can deepen the calculation not only in terms of products, but also in terms of managers, sales channels, and branches - this will provide more information important for decision-making.
Return on sales measures how much of a company's revenue is profit.
The return on sales formula is calculated for a certain period of time, the unit of measurement is percentage. The general formula for finding return on sales is as follows:
Рп=(П/В)*100%,
where Рп – profitability of sales,
P – enterprise profit,
B is the company’s revenue.
Types of profitability of sales
When calculating return on sales, different types of profit are used, so there are different versions of the return on sales formula. Let's look at the most common types of return on sales:
- Return on sales in accordance with gross profit, which is calculated as the quotient of gross profit divided by revenue (in percent):
Rp(VP)=(Pval/V)*100%
- Operating return on sales, which is the quotient of profit before tax divided by revenue (as a percentage):
Rp(OP)=(Pop/V)*100%
- Return on sales in accordance with net profit, which is the quotient of net profit divided by revenue (in percent):
Rp(ChP)=(Pch/V)*100%
What does the return on sales formula show?
Using the return on sales formula, you can find a coefficient that shows what part of the profit will come from each ruble earned. The values found using the profitability formula will differ for each enterprise, since their product range and competitive strategies differ.
Most common three types of return on sales and they show:
- Gross profit margin shows how many percent of gross profit is in each ruble of goods sold;
- Operating return on sales will show what share of profit will be accounted for for each ruble that is received from revenue from which interest and taxes have been paid;
- Return on sales based on net profit reflects what share of net profit will fall on each ruble earned.
Determining return on sales helps optimize pricing policy enterprises, as well as costs that relate to commercial activities.
The meaning of the return on sales formula
Return on sales is often called the profitability rate, since this indicator reflects the share of profit in revenue.
When analyzing the coefficient that characterizes the profitability of sales, it is important to note that if the profitability of sales decreases, this indicates a decrease in the competitiveness of the product and a decrease in demand for it. Then the company’s management should think about carrying out events that help stimulate demand, increase the quality of products sold, or conquer a new niche in the market.
By identifying trends in changes in the profitability of sales over time, economists distinguish between the reporting and base periods. As the base period, the indicators of previous years (years) when the company received the greatest profit are used. Determining the base period is necessary to compare the return on sales ratio for the reporting period with the ratio that is taken as the basis.
Examples of problem solving
EXAMPLE 1
EXAMPLE 2
| Exercise | Calculate the operating profitability of sales using indicators taken from Form No. 2 of the “Profit and Loss Statement” The following indicators are given: Profit before tax – 15,025,000 rubles, Revenue for this period is 30,215,000 rubles. |
| Solution | Operating profitability is calculated using the following formula: Rp(OP)=(Pop/V)*100% Rp(OP)=(15025000/30215000)*100%=49.73% Conclusion. Since this type of profitability shows what part of the profit is in each ruble of revenue (excluding interest and taxes paid), we can conclude that after paying the appropriate tax payments, each ruble of revenue will contain 49.73% of profit. |
| Answer | Operating return on sales is 49.73% |
