What profitability is considered normal: calculation rules and definitions. What is profitability? How to calculate? Return on sales is calculated using the formula

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: profit 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.

What does the concept of profitability mean? This is a relative value that reflects the performance indicator of the enterprise.

Calculation of the formula for return on sales.

Return on sales is a kind of indicator of pricing policy. Alternatively, it is considered as an indicator of cost control.

For example, in competitive companies, net return on sales and formula display performance based on strategy and product line mix.

Often this data is used to evaluate operational efficiency. One caveat: given the same revenue, costs and relatively equal profit indicators (before tax), the profitability of sales of similar companies can differ dramatically.

This may be due to the influence of the volume of interest payments on the size of the PE (net profit).

What is the essence of the return on sales ratio? This indicator is characterizing in determining the efficiency of production activities.

That is, the level of profitability of sales and the formula that clearly displays the calculations actually shows the size of the PE (net profit) per currency unit of sales.

That is, how much remains with the company after the costs of production costs, interest payments on currently existing loans and corresponding tax deductions are covered. In other words, this indicator reflects the share of cost in sales.

The PIC is determined primarily by the performance indicators of a certain reporting period. It is important to know: the PIC does not reflect the intended effect of long-term investments.

For example, an enterprise is switching to new technologies, or, alternatively, planning to release new products, which may require additional investments. In such cases, the CRP may decrease.

However, provided the strategy is correct, this cannot be considered an indicator of low efficiency of the company, since the costs pay off quite quickly.

How to find the formula for return on sales?

RP (return on sales) is an indicator of pricing policy that reflects the ability of company management to keep possible costs under control.

For example, Gross Profit Margin - RP for marginal income.

The indicator is expressed as a percentage of marginal income to revenue received from the sale of goods/services.

For example, Gross Profit Margi: how to calculate return on sales, formula:

GPM = (sales revenue, taking into account the deduction of variable costs / sales revenue) x 100%

Find the answer in this article.

Formula for return on sales on balance sheet.

The profitability ratio, which reflects the share of profit received in each currency unit earned, is actually profitability. The calculation is not complicated: the ratio of profit after tax (net profit) to sales volume (in monetary terms) for a certain period.

That is, the profitability of sales is determined by the formula:

PE/V;

where: PE – net profit, B – revenue.

Formula for return on sales ratio.

KRP shows the share of PE (net profit) in the company's total sales. This is the main indicator that is used most often to display the profitability of an enterprise.

Accordingly, the indicator should not be negative and correspond to the current inflation rate. Alternatively, for enterprises in highly developed economies, the EIC is correlated by industry.

The calculation is made as follows: return on sales - formula, example:

ROS = NI/NS

Explanation:

ROS: Return on Sales – actual profitability of sales;
NI: Net Income – net profit in a certain currency;
NS: Net Sales – revenue or net sales in general.

Important! KRP is the most important indicator that allows you to determine the profitability of an enterprise from each currency unit due to the sale of goods/services.

The return on sales ratio can be calculated both for individual items of goods/services and as a whole. This is especially important for analyzing the economic activity of an enterprise.

Return on sales- an indicator of the financial performance of an organization, showing what part of the organization’s revenue is profit. At the same time, various profit indicators can be used as a financial result in the calculation, which leads to the existence of various variations of this indicator. The most widely used are the following: sales by gross profit (gross profit margin), operating profitability (return on sales, ROS), return on sales by net profit (net profit margin).

Calculation (formula)

Return on Sales by Gross Profit = Gross Profit / Revenue

Gross profit is the difference between two key figures on the Income Statement: revenue and cost of sales.

Operating margin = / Revenue

where EBIT is earnings before interest and taxes

Return on sales based on net profit = Net profit / Revenue

To calculate all the above profitability indicators, the data contained in the 2nd form of financial statements - the “Profit and Loss Statement” - is sufficient.

The normal value of return on sales is determined by industry and other characteristics of the organization. With the same financial efficiency, for organizations with a long production cycle, the profitability of sales will be higher, for “high-turnover” activities - lower. Return on sales shows whether the activity of an enterprise is profitable or unprofitable, but does not answer the question of how profitable investments in this enterprise are. To answer this question, return on assets and equity (return on equity, return on invested capital) is calculated.

One of the economic indicators of the efficiency of organizing the activities of an enterprise is return on sales (hereinafter referred to as RP).

It allows you to determine how profitable the entire process from manufacturing to sales of manufactured products is for the company. This value depends on the indication of gross profit (hereinafter referred to as GP), revenue and other factors.

The concept of profitability and its main types

The RP indicator is very widely used in all sectors of the economy in order to find out how effectively the enterprise uses current costs.

This indicator is measured as a percentage, showing the ratio of profits to expenses. This coefficient shows what share it takes in each ruble earned after the sale of manufactured products.

Exists several types of RP depending on the parameters used when determining it:

1. by value before interest and taxes in each ruble of revenue;
2. according to VP indications (Operating Margin, Gross Margin, Sales margin,);
3. by net profit, part of which falls on 1 ruble of revenue (Profit Margin, Net Profit Margin).

Obtaining net profit is possible only if the company carries out expedient activities aimed at rational use of investments. The coefficient also depends on capital turnover and output volume.

What characterizes this meaning?

The RP parameter is an indicator of economic efficiency that characterizes the company's profitability from production activities.

By its meaning carry out analysis about how rationally the organization uses its available production resources:

If the results of the activities of non-profit structures are analyzed, then this parameter will assess the overall effectiveness of their work. For commercial departments, accurate quantitative characteristics are important when making calculations. RP is similar to efficiency, only the parameters in this analysis are the result obtained as a result of the activity, which is presented as the ratio of costs incurred to the amount of profit received. The more benefits received, the more profitable the production.

At enterprises, RP is an indicator of the organization’s pricing policy and competent cost control. Diversity in the competitive strategies of an enterprise is stimulated by the large difference in the parameters of the RP in different companies. It is widely used to analyze the operational efficiency of organizations.

For information about what this indicator is, the rules and examples of its calculation, see the following lesson:

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Calculation procedure and rules

The RP indicator is calculated in order to to carry out analysis such factors:

• dynamics of company development;
• efficiency of production processes;
• methods of product sales.

The RP value is usually calculated as the ratio of net profit, from which taxes have already been withheld, to the volume of proceeds received from sales for the same period of time.

By gross profit

The RP coefficient calculated using the VP parameter is called in English: GrossProfitMargin.

It is obtained by solving a simple formula - the ratio of VP to revenue:

RPval=VP/V,
where B is revenue.

This parameter shows the size of the VP’s share in kopecks contained in 1 ruble of proceeds.

By operating profit

The numerical value found as a result of the ratio of operating profit to the amount received after the sale of products is the RP for operating profit or also called Return on Sales (ROS).

The formula for determining this parameter is as follows:

where Ebit is operating profit. This value is obtained as the sum of two lines: 2300 “Profit (loss) before tax” and 2330 “Interest payable”;
Tr – proceeds after sales.

In English, operating profit sounds like Earnings before Interests and Taxes.

In this parameter, as in the previous case, you can immediately see the penny share of operating profit included in 1 ruble.

This parameter is an intermediate performance assessment coefficient between sales profit and net profit.

By net profit

The designation Net Profit Margin (Npm) belongs to the term net profit margin. It is determined as a result of the ratio of net profit to total revenue. In this case, they talk about RP, which shows what share of net profit falls on 1 ruble of revenue.

The formula looks like this:

Npm=Pr./Tr,

in which net profit (Tr) is determined by multiplying the price by the number of items sold from the output:

Tr=W*L,
W – price, L – number of units sold.

Net profit =Tr - Total cost - Expenses + Income - Taxes,

where are the indicators “Expenses” and “Incomes” arising from the non-core activities of the enterprise. These include exchange rate differences in currencies, transactions with securities, in the production of other enterprises through, etc.

Balance formula

Another option for calculating the RP indicator is a formula that uses balance sheet data:

RP = profit from sales / amount of revenue

RP = line 050 / line 010 f. No. 2,

where profit from sales is the value from line 050 in form No. 1 of the enterprise; the amount of revenue is reflected in line 010 in form No. 2.

Each of the above calculation options is used in one case or another to analyze the company’s sales activities.

Return on sales ratio

The share of net profit in total sales is determined using return on sales ratio(hereinafter KRP).

It is the most important among other indicators of a company's profitability. The indicator cannot have a negative value and correspond to the current inflation rate. In order for it to show a smaller error in countries with highly developed economies, the coefficient is correlated depending on the industry.

The formula for calculating the coefficient is as follows:

KPR = net profit/sales revenue.

This parameter can be calculated either for individual items (for example, for a specific product) or as a whole for total products. Calculations must be done quite often, because... This is important for organizing rational production at the enterprise, which allows you to stably maintain and increase the flow of profits.

Calculation example

To calculate the RP parameter required for analysis and find out how much net profit the company received from the sale of goods, you need to apply the formula. To make it easier to understand how to calculate RP, let's look at an example.

The company received total sales revenue for the year 2014 amounted to 15.85 million rubles, and in 2015 it increased to 17.51 ​​ml. rub.

The net profit amounted to:

• in 2014 – 3.8 million rubles;
• in 2015 – 4.9 million rubles.

Do you need to determine how the RP has changed?

To answer, you must first find out the KRP for 2014 and 2015. To do this, let’s substitute the initial data into the formula for calculating the CRP given above:

KRP (2014) = 3.8/15.85 = 0.2397 or in terms of net profit RP (2014) = 23.97%.

KRP (2015) = 4.9/17.51 ​​= 0.2798, respectively, and RP (2015) = 27.98%.

Now we need to clarify how the value has changed as follows:

RP (2015) - RP (2014) = 27.98-23.97 = 4.01%.

From the calculations it follows that in 2015 the profitability of sales increased significantly by 4.01%.

Analysis of the results obtained

By analyzing the value of return on sales, the management administration tries to find out how correctly the use of costs is organized in order to make a profit.

In many enterprises this analysis needed for the following:

• stable revenue and increased profits;
• control over the development of the company;
• making comparisons with competing firms;
• detection of profitable and unprofitable products, etc.

The management of the organization must carefully consider measures to increase profits and reduce losses in production activities. What to do if you need to increase your RP? What to do if profitability decreases? Regular monitoring and analysis of the RP level allows you to identify a lot of extremely important information. During the calculations, it becomes clear how production is developing, what needs adjustment, and what factors, on the contrary, do not require changes.

For every business activity, there is no more important goal than to constantly increase your income. To do this, it is necessary to regularly calculate all options for determining profitability and record the results obtained.

The main source of movable capital is revenue received from the sale of products. Therefore, one of the main directions of activity of the subject should be to increase the RP indicator by observing the economy regime, reducing costs, and rational use of enterprise resources.

Due to the fact that the volume of costs for raw materials requires considerable investments, and increasing profitability implies reducing costs, it is necessary to rationally calculate the costs of purchasing materials. This will increase the KRP and increase profits.

Marketing market research will make it possible to establish an improved production of products similar to similar products from competitors and increase customer demand for their products.

Main activities for the use of labor resources affecting to increase profitability, such:

• optimal use of workers employed in production;
• increasing the skills and qualifications of working personnel;
• optimization of costs for departments that are not involved in direct production of products;
• use of automated mechanisms in production;
• promoting staff interest in increasing productivity.

Main factors that may influence to reduce sales profitability, such:

• Expenses are growing faster than revenue from product sales;
• The decline in revenue outpaces the increase in costs;
• There is a decrease in revenue against the background of increasing costs.

The first option is usually associated with an increase in corporate costs with a forced reduction in prices due to the onset of unfavorable market conditions. The second point is characterized by a drop in product sales.

And in the latter case there is a series factors influencing the decrease in RP. These include:

• the need to reduce prices for manufactured products;
• reduction in assortment due to the inability to stop the increase in corporate costs.

It is necessary to analyze these factors and revise the economic policy of the enterprise in order to prevent and gradually increase the RP indicator.

Standard values ​​of this indicator for Russia

RP depends on many factors. The highest indicators are in the trade and mining industries, and the lowest in heavy engineering.

For this parameter influence:

• Industry;
• Region;
• Terrain;
• Kind of activity;
• Seasonality, etc.

According to statistics, in 2014 there were such profitability indicators:

• The maximum number belongs to the mining sector (24-33%) and chemical production (16.7%).
• Large business areas are showing a decrease in profitability due to falling prices and consumption on world markets.
• Enterprises in the small and medium segment of the economy showed a slight increase of about 0.9% of GDP.
  Due to the turbulent geopolitical situation, the profitability of some industries has decreased, but nevertheless growth is observed and economists predict that retail trade could grow by 2.1% per year.

The rules and procedure for calculating profitability are discussed in the following video:

They are obtained by dividing the profit from the sale of products by the amount of revenue received. The initial data for its calculation is the balance sheet.

It is calculated in the FinEkAnalysis program in the Profitability Analysis block as Return on Sales.

Return on sales - what it shows

Shows how much profit the company receives from each ruble of products sold.

Return on sales - formula

General formula for calculating the coefficient:

Calculation formula based on the old balance sheet data:

K rp =	page 050	*100%
	p.010

where line 050 and line 010 of the profit and loss report (form No. 2).

Calculation formula based on the new balance sheet:

Return on sales - meaning

It is used as the main indicator for assessing the financial performance of companies with relatively small amounts of fixed assets and equity capital. Assessing the profitability of sales makes it possible to objectively look at the state of affairs.

The return on sales indicator characterizes the main aspect of the company's work - the sale of main products.

Return on sales - diagram

1. Increasing the indicator.

a) Revenue growth rates outpace cost growth rates. Possible reasons:

• increase in sales volumes,
• change in sales mix.

With an increase in the number of products sold in physical terms, revenue increases faster than costs as a result of production leverage.

The components of product cost are variable and fixed costs. Changing the cost structure can greatly affect profit margins. Investing in fixed assets is accompanied by an increase in fixed costs and, theoretically, a decrease in variable costs. Moreover, the relationship is nonlinear, so finding the optimal combination of fixed and variable costs is not easy.

In addition to simply raising prices for its products, a company can increase revenue by changing its product mix. This trend in the development of the enterprise is favorable.

b) The rate of cost reduction is faster than the rate of revenue decline. Possible reasons:

• increase in prices for products (works, services),
• change in the assortment structure.

In this case, there is a formal improvement in the profitability indicator, but the volume of revenue decreases; the trend cannot be called unambiguously favorable. To correctly draw conclusions, analyze the pricing policy and assortment policy of the enterprise.

c) Revenue increases, costs decrease. Possible reasons:

• price increase,
• change in sales mix,
• change in cost standards.

This trend is favorable, and further analysis is carried out to assess the sustainability of this position of the company.

2. Decrease in indicator.

a) The growth rate of costs outpaces the growth rate of revenue. Possible reasons:

• inflationary growth in costs outpaces revenues,
• price reduction,
• change in the structure of the sales range,
• increase in cost standards.

This is an unfavorable trend. To correct the situation, they analyze the issues of pricing at the enterprise, assortment policy, and cost control system.

b) The rate of revenue decline is faster than the rate of cost reduction. Possible reasons:

• reduction in sales volumes.

This situation is common when an enterprise reduces its activities in the market. Revenue declines faster than costs as a result of operating leverage. An analysis of the company's marketing policy should be made.

c) Revenue decreases, costs increase. Possible reasons:

• price reduction,
• increase in cost standards,
• changing the structure of the sales range.

An analysis of pricing, cost control systems, and assortment policy is required.

In normal (stable) market conditions, revenue dynamics change faster than costs only under the influence of production leverage. The remaining cases are associated either with changes in the external and internal conditions of the enterprise’s functioning (inflation, competition, demand, cost structure), or with an ineffective system of accounting and control in production.

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Synonyms

More found about return on sales

1. Analysis of the profitability of the main activities of a trading organization It characterizes the efficiency of business activities and how much profit the organization has from one ruble of sales. Profitability of sales is defined as the ratio of profit from sales or net profit to the amount received
2. Analysis of the current level, features and trends of profitability indicators of Russian joint-stock companies Cost profitability Product profitability - the ratio of profit from sales to the cost of sales Product profitability shows the profit that the company received per 1 ruble of current costs Let's imagine the percentage
3. Sales return on profit before tax Sales return on profit before tax - what shows Sales return on profit before
4. Return on sales ratio Synonyms return on sales return on products sold return on sales by profit before tax is calculated in the FinEkAnalysis program in
5. Assessing the influence of factors on profitability indicators Or if you try the reduction method, divide the numerator and denominator by revenue, then you can use the following factor model: return on sales multiplied by the turnover ratio of current assets Profit from sales multiplied by the turnover ratio
6. Total profitability of sales Total profitability of sales Total profitability of sales - definition Total profitability of sales - coefficient equal to the ratio of book profit
7. Low threshold of profitability and on-site inspections Profitability indicators can be divided into two groups: return on sales return on assets Return on sales is a profitability ratio that shows the share of profit in each
8. Profitability of products sold Synonyms return on sales return on sales ratio sales return on profit before tax is calculated in the FinEkAnalysis program in the Profitability Analysis block
9. Analysis of financial assets according to the consolidated statements of NROSEBIFA - net return on sales by earnings before interest and before taking into account income expenses from financial assets
10. Formation of a scoring model for assessing the creditworthiness of a corporate borrower EBIT Interest 0.0790 4 > 1.5 4 1.3-1.5 3 1-1.3 2< 1 0 Рентабельность продаж ROS 0,1256 6 > 0,025 6 0,02-0,025 5 0,015-0,02 3 < 0,015 0
11. Pre-audit analysis as a tool for predicting on-site tax audits of penal system institutions and its improvement Return on sales % Return on assets % Return on sales % Return on assets % Garment production 7.1 3.5
12. Factor analysis of the formation and use of the company's profit Profitability of products sold, return on sales is calculated using the formula The reduction in the level of the return on sales ratio is a negative trend The enterprise does not
13. Factor analysis of the financial results of agricultural producers The influence of factors on the profitability of sales or the profitability of core activities can be assessed using the method of chain substitutions Substitutions Factor rub Product profitability
14. Features of the financial policy of companies in times of crisis ROS - net return on sales on earnings before interest kic - turnover ratio of invested capital In the index
15. Anti-crisis management of the financial and economic stability of an industrial enterprise. Reasons for the decrease in profitability of sales; increase in production costs; drop in sales volumes. Having determined the reasons for the decrease in profitability of sales, we can name
16. Key aspects of managing the profit of an organization The following groups of profitability indicators can be distinguished: return on assets with detailing into non-current current and net assets return on capital of total equity debt return on sales return on expenses When calculating the profitability indicators of XYZ OJSC, balance sheet data for 2013 were used
17. Forecast balance taking into account current trends, forecast volumes and profitability of sales, changes in non-current assets FinEkAnalysis, you can quickly build a forecast balance sheet taking into account current trends of forecast volumes and profitability of sales changes in non-current assets Example of a report automatically generated by the FinEkAnalysis program Forecast balance taking into account