Profitability on sales: Everything to calculate and interpret

He says a famous phrase: “What cannot be measured, cannot be improved”. This is not the case of return on sales, an indicator that is quite easy to calculate, which is also essential to know the viability of your business. And the thing is that more important than selling is to make these sales profitable. Because of course, what's the point of achieving sales objectives if your company loses money? In this new Mobilvendor article, we will discover what sales return is, how to calculate it, how to interpret it and what to do to optimize this important indicator.Contents hide 1 What is return on sales and how is it calculated? 2 Sales Profitability Formula* How do sales affect your company's profitability? 4 How to interpret your return on sales ratio? What is return on sales and how is it calculated? Return on sales is a financial ratio that results from dividing operating profit by net sales. The result is an indicator that allows us to evaluate the company's operational efficiency, that is, the company's capacity to convert sales into profits. Sales profitability indicates how much profit is obtained for each euro of the amount of sales for a given period. Profitability on sales serves to measure both the company's efficiency and its profitability, and is an extremely important indicator for investors and other stakeholders. It is a key metric to know the possibilities that a company has to recover its debt, to return the investment. The return on sales is calculated with the following formula: Profitability on sales = Gross Profit/SalesTo apply the formula, amortization, interest or taxes are not taken into account when taking the gross profit. As for sales, total revenues are not measured, but net sales, that is, refunds or credits for merchandise returns and other items must be subtracted. The result of the division is the percentage of revenue that is converted into profit. To improve sales profitability, the company needs to find ways to reduce costs while maintaining or increasing sales revenue.Sales profitability formulaThe formula for calculating return on sales is expressed as follows: Profitability on Sales (%) = (Net Profit/Sales Revenue) ×100Sales Profitability (%) = (Sales Revenue/Net Profit) ×100Where:Net Profit/Net Profit is the total profit after deducting all costs and expenses. Sales RevenueSales Revenue is the total revenue generated from sales.This formula provides you with a percentage that represents a company's profitability in relation to its sales revenue. How do sales affect your company's profitability? No business can be profitable without sales, but a drop in sales doesn't have to mean lower profitability. When we talk about the sales return ratio, we are usually referring to a general fact in the company's data analysis, which is the overall result that usually interests investors. But keep in mind that most companies sell not just one, but a whole series of products and/or services. The sales return of a business is the sum of the individual returns of all the products or services it markets. When the company is considering improving sales profitability, it needs to know the individual profitability of each of them. This calculation requires calculating what part of the production costs must be passed on to each product or service that the company sells, something more complex than knowing the amount of sales of each one, but equally important. In the event that the company is showing a lower rate of return on sales than desired, calculating the individual profitability of the products will allow us to know what are the that are hampering the result. When the profitability of an individual product is negative, the increase in sales of the product means a drop in profits. In the same way, achieving increased sales of a product with good individual profitability implies an increase in profits. Note, this does not mean that the company should choose to remove the least profitable products from production. Sometimes it happens that an unprofitable or even unprofitable product continues to be offered because it is part of the company's strategy, for example, because of its ability to attract customers. For a good management of this indicator, it is essential that the company knows the individual profitability of its products or services and the way in which the sales of each one affect the overall result. How to interpret your return on sales ratio? Let's look at it with an example: Which company is more profitable, company A that makes $150,000 in sales at a cost of 100,000€ or company B that sells for $75,000 and requires $30,000 to do so? Company A's profitability to sales ratio is 33%, while that of company B is 60%. Company B is much more profitable, and this is an example that clearly shows that a very high sales figure does not mean, much less, that the company is profitable. The calculation of this ratio, the monitoring of its evolution and its analysis, is much easier when using specialized commercial management software. This allows the analysis to be taken to another level. When the ratio is growing, it means that the company is becoming more efficient. However, a decreasing ratio is an indication of lower efficiency and of present or imminent financial problems. If the data is not available in different periods, the company's result can be compared with the profitability ratio of other companies. However, this ratio varies a lot from one sector to another, so it should only be used to compare companies in the same sector, even better if it is between companies with similar business models and figures. Using a commercial management module such as Mobilvendor will provide you with all the information you need to improve decision-making and also your strategy. Get your company to offer a reliable and reliable current image with a next-generation tool. With Mobilvendor you can increase your profitability by more than 20% from the third month of implementation. Schedule personalized advice totally free of charge.