📖 DEFINITIONS
✦ Return on Sales:
Measures profitability from total revenue before accounting for interest and taxes. Calculated as EBIT (Earnings Before Interest and Taxes) divided by revenue, ROS reveals how much profit a company makes per dollar of sales.
→ ROS is useful for comparing profitability across companies with different capital structures.
✦ Operating Margin:
Shows what percentage of revenue remains after covering operating costs, aligning with Generally Accepted Accounting Principles (GAAP). Calculated by dividing operating income by revenue, it emphasizes core profitability from business operations.
→ It provides a standardized view of efficiency and profitability.
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🔢 FORMULAS
✦ ROS = EBIT / Revenue
✦ Operating Margin = Operating Income / Revenue
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⚙️ CONTEXT
✦ ROS
→ It highlights how well a company turns every type of sales and investment into profit;
→ It’s helpful in assessing overall profitability across industries, particularly for companies with varied debt levels.
✦ Operating Margin
→ It shows how much revenue is retained after core operating expenses; It excludes non-operating items, interest and taxes for a focus on operational health;
→ Standardized by GAAP, it’s ideal for comparing profitability within the same industry.
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📊 MORE
✦ ROS
→ Use Case: ROS is valuable for broad industry comparisons and helps assess efficiency in converting sales into profit;
→ Target: Higher ROS is typically found in industries with high gross margins, like technology, while lower ROS is common in sectors like retail.
✦ Operating Margin
→ Use Case: Operating Margin focuses on core business efficiency, emphasizing costs related to main operations;
→ Target: Industries with less competition often have higher margins, as they retain more revenue after operating expenses.
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💡 SUMMARY
✦ ROS → Measures overall profit per dollar of revenue, using EBIT; it’s ideal for cross-industry comparisons;
✦ Operating Margin → Shows core profitability as a percent of revenue, excluding non-operating costs, aligning with GAAP.
✦ ROS and Operating Margin both reveal profitability, but Operating Margin is standardized, making it more comparable within industries.
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