when calculating return on sales investors might notice that some companies report net sales while others report revenue net sales is total revenue minus the credits or refunds paid to customers for merchandise returns net sales will likely be listed for companies in the retail industry while others will list revenue 
below are the steps to calculate return on sales return on sales is a financial ratio that calculates how efficiently a company is generating profits from its top line revenue it measures the performance of a company by analyzing the percentage of total revenue that is converted into operating profits the calculation shows how effectively a company is producing its core products and services and how its management runs the business therefore ros is used as an indicator of both efficiency and profitability investors creditors and other debt holders rely on this efficiency ratio because it accurately communicates the percentage of operating cash a company makes on its revenue and provides insight into potential dividends reinvestment potential and the company s ability to repay debt ros is used to compare current period calculations with calculations from previous periods this allows a company to conduct trend analyses and compare internal efficiency performance over time it is also useful to compare one company s ros percentage with that of a competing company regardless of scale the comparison makes it easier to assess the performance of a small company than a fortune 500 company however ros should only be used to compare companies within the same industry as they vary greatly across industries a grocery chain for example has lower margins and therefore a lower ros compared to a technology company return on sales and operating profit margin are often used to describe a similar financial ratio the main difference between each usage lies in the way their respective formulas are derived the standard way of writing the formula for operating margin is operating income divided by net sales return on sales is extremely similar except the numerator is usually written as earnings before interest and taxes ebit while the denominator is still net sales example of how to use return on salesfor example a company that generates 100 000 in sales and requires 90 000 in total costs to generate its revenue is less efficient than a company that generates 50 000 in sales but only requires 30 000 in total costs ros is larger if a company s management successfully cuts costs while increasing revenue using the same example the company with 50 000 in sales and 30 000 in costs has an operating profit of 20 000 and a ros of 40 20 000 50 000 if the company s management team wants to increase efficiency it can focus on increasing sales while incrementally increasing expenses or it can focus on decreasing expenses while maintaining or increasing revenue limitations of using return on salesreturn on sales should only be used to compare companies that operate in the same industry and ideally among those that have similar business models and annual sales figures companies in different industries with wildly different business models have very different operating margins so comparing them using ebit in the numerator could be confusing to make it easier to compare sales efficiency between different companies and different industries many analysts use a profitability ratio that eliminates the effects of financing accounting and tax policies earnings before interest taxes depreciation and amortization ebitda for example by adding back depreciation the operating margins of big manufacturing firms and heavy industrial companies are more comparable ebitda is sometimes used as a proxy for operating cash flow because it excludes non cash expenses such as depreciation but ebitda does not equal cash flow that s because it does not adjust for any increase in working capital or account for capital expenditures that are needed to support production and maintain a company s asset base as operating cash flow does 