As revenues and efficiency increases, so do profits. Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. If Jim wants to increase his net operating income, he can either focus on reducing expenses or increasing revenues. 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.
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BREAKING DOWN 'Return on Sales (ROS)' ROS 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. Return on Sales Asset Turnover Return on Assets. The reason we put these three together is because they relate; the first two multiplied together give you the third. These three ratios hang together as a triangle, but each must be understood individually in order to make sense of the whole equation. The return on sales is a ratio used to derive the proportion of profits generated from sales. The concept is useful for determining the ability of management to efficiently generate a profit from a given level of sales.