Return on Sales: A Simple Explanation

The net profit margin is one of the most important metrics for assessing a company’s overall profitability. It shows how much of the revenue generated actually remains as profit—after deducting all costs, interest, and taxes.

What is the net profit margin?

The return on sales compares annual profit to revenue and expresses the result as a percentage. It answers the question: How many cents of profit does your company retain for every dollar of revenue?

Unlike the EBIT or EBITDA margin, the return on sales considers the result at the bottom of the income statement—that is, after all operating costs, interest, and taxes. It is therefore the most comprehensive profitability metric.

Why is return on sales important for SMEs?

Return on sales is particularly meaningful because it reflects the actual bottom-line result of your business operations. It shows whether your company is profitable on the bottom line—after taking all factors into account.

For SMEs, this metric is also valuable because it is simple to calculate and easy to communicate. Banks, investors, and business partners value the return on sales as a quick indicator of a company’s financial health.

Calculating the Return on Sales

The calculation is very simple: divide the annual profit (net profit) by revenue and multiply the result by 100. You’ll find the net profit at the bottom of your income statement—after deducting all expenses, including interest and taxes.

A concrete example

Suppose your company generated revenue of 1,200,000 Swiss francs and reported a net profit of 60,000 Swiss francs at the end of the fiscal year. The return on sales is calculated as follows: 60,000 divided by 1,200,000 times 100 equals 5 percent.

This means: For every franc of revenue, your company retains 5 centimes as net profit—after deducting all costs, interest, and taxes.

What is a good return on sales?

The return on sales varies significantly by industry. In the Swiss retail or wholesale sectors, 2 to 5 percent is often already a good result. In the service sector, figures of 5 to 15 percent are realistic, while software-based business models sometimes achieve returns of over 20 percent.

A return on sales below 1 percent is usually a clear warning sign. It means the company has little room for investment or to weather crises. A continuous decline in the return on sales should also prompt a more detailed analysis.

Improving Return on Sales

There are essentially two ways to improve return on sales: by increasing revenue while keeping costs constant, or by creating a more efficient cost structure while maintaining revenue. In practice, a combination of both approaches is usually the most effective.

It is important that you regularly monitor the development of your return on sales and compare it with previous periods as well as industry benchmarks. Findea is happy to support you in systematically analyzing your profitability metrics and identifying areas for improvement.

The complete guide at a glance

This article is part of our comprehensive series on the most important financial metrics for Swiss SMEs. In the complete guide to the 10 most important financial metrics for SMEs, you’ll find all the metrics at a glance—from profitability and liquidity to financing structure.

Formula: Return on Sales

Return on Sales (%) = (Net Profit ÷ Revenue) × 100

Net Profit = Annual Profit after Interest and Taxes