What is the return on sales

Profitability is one of the indicators of business activity of the enterprise which are necessary for making management decisions. It is used in financial statement analysis, valuation of economic activity, the pricing process. The level of effectiveness of sales characterizes their profitability.

Profit margin shows what part of the revenue of the enterprise has profit, and it is their ratio:
Profit margin = Profit / Revenue x 100%.

Thus its calculation can be carried out by different types of profit: gross, operating, that is, from the main activity, and clean. Formula of computation as follows:
- Return on sales (gross profit = gross profit / Revenue x 100%;
- Operating margin = Profit from sales / Revenue x 100%;
- Net profit margin = Net profit / Revenue x 100%.

The profitability ratio net profit margin shows how much net profit the enterprise has from 1 rouble of sales, i.e. how much available funds remain available after funding for core activities, interest payments on loans, other expenses and taxes. The profitability ratio's gross profit margin characterizes the main activities of the company and to determine the share of costs in sales and trading margin.

Profitability of sales is calculated according to the profit and loss statement (forms No. 2 of the balance sheet) at the reporting date. For objective evaluation it is necessary to consider its dynamics, that is, for several periods. Based on the analysis of changes of the coefficient we can conclude about the effectiveness of business management: the growth of evidence of competent and correct decision of the leadership of the organization and the reduction of potential problems in operation.

The change in the coefficient of profitability of sales in one direction or another can be attributed to various factors: the increase in the absolute rate of profit, reduced sales, etc. it is Important to identify the reasons: the higher prices for the products and services may be normal or low value, but if it is associated with a decline in consumer demand and interest in the company's product, it is regarded as a disturbing factor.

On the background of the implementation of advanced technologies or the development of new activities often marked by a temporary reduction of profitability of sales. However, when correctly chosen strategy of development in the future, the investments will pay off, and profit margin may rise to previous levels, and to overcome it.