What is ROS? Role, meaning and formula for calculating ROS

ROS is an important indicator in financial reports, reflecting the business results of an enterprise. So what is ROS ? Join 1C Vietnam to learn the concept, meaning and exact formula for calculating ROS through the article below.

1. What is ROS?

ROS (Return On Sales) is also known as return on sales or profit on sales ratio. Through the ROS index, businesses can clearly understand the amount of money earned from selling products/services and profits (after deducting all after-tax expenses).

2. The role of ROS index in financial reporting

ROS is an important indicator in financial reporting. Based on this index, businesses will evaluate the current business situation and make timely adjustments. To better understand the role of the ROS index, we need to clearly understand the cases of ROS in the following financial statements:

2.1. In case of negative ROS (<0%)

If the ROS index is negative, the business is suffering losses and the management system is ineffective in controlling costs, including: input costs, sales costs, management costs, etc. A negative ROS index is also shows that the business is having difficulty paying its debts. This requires managers to quickly find measures to improve performance.

2.2. In case of positive ROS (>0%)

Positive ROS (>0%) shows that the business is profitable, has the ability to repay debt and generate profits from sales. This also shows the effectiveness in managing costs and optimizing business profits. In particular, the higher the ROS index shows that the business operations ofthat enterprise are extremely favorable.

3. What is the meaning of the ROS index?

It can be seen that ROS plays an extremely important role in financial reports. The fluctuation of this index shows the business efficiency of an entire enterprise. So what is the meaning of the ROS index? Specifically includes:

• Measuring profits: ROS index shows the amount of profit generated from each unit of business revenue. ROS helps determine whether the amount of profit generated is enough to maintain and grow business activities.
• Comparison with industry: ROS index provides a basis for comparing business performance with competitors in the same industry.
• Predicting the future: ROS can be used to predict the future growth of a business. Managers can base on the ROS index to plan appropriate business strategies, anticipate opportunities and take measures to address challenges.
• Measuring management efficiency: ROS shows an enterprise's management ability to use resources and optimize business processes. This helps businesses propose quick improvement measures if problems arise in the management system.
• Basis for improving and optimizing business/operating costs: ROS is one of the tools that help adjust business strategies. When the ROS index is low, businesses can consider adjusting prices or cutting unnecessary fees.

4. The most accurate way to calculate ROS

4.1. Formula to calculate ROS

How to calculate the ROS index and is it difficult is a question that many leaders are interested in. Actually, the way to calculate ROS is quite simple, specifically:

ROS = (Net profit / Net revenue) x 100% (unit: %)

In there:

• Net revenue = Sales revenue (actual) – Revenue deductions.
• Profit after tax = Profit before tax – Total taxes to be paid + Deferred taxes.

4.2. Illustration

For example: According to the financial report results of Vinamilk company in 2021, revenue reached more than 61,910 billion VND, profit after tax reached more than 10,731 billion.

ROS = (11 731 / 61 910) x 100% = 19%

5. What ROS index is good?

After understanding the definition of ROS, the question "What is a good ROS index" is also of interest to many business owners. Below are cases showing that the ROS index is at a good level:

• Industry average index:

The industry average shows the fixed average value of an industry. This index is the basis for comparing the performance of businesses in the same industry.

If a business's ROS is higher than the industry average, it shows that the company is performing extremely well compared to other organizations. However, for some industries such as trade, construction, and manufacturing, a ROS index higher than the industry average is a normal sign.

• ROS index < 0 (negative): Shows that the business is making a loss. Negative ROS shows that the company's strategy or management is having problems and needs to be improved quickly.
• ROS index > 10%: In case ROS > 10, businesses should boldly promote investment because this is a sign that business activities are extremely effective and have potential.

6. Manage financial targets effectively with 1C:Company Management

1C:Company Management is an open solution with flexible features to automate business administration. Among them, financial management features stand out, specifically as follows:

• Ability to set up multiple currencies, create multiple bank accounts and cash funds at the same time.

• Plan income and expenditure in stages to control financial obligations easily.

• Set up a simple and convenient payment schedule.
• Features to record, check and analyze debt with suppliers and customers in detail, specifically and transparently.

• Calculate interest and principal to be paid for each loan and loan contract using many different methods...

Through 1C:Company Management software, businesses can easily monitor ROS in particular and financial indicators in general. At the same time, businesses will also understand the overall financial situation and make appropriate revenue and expenditure plans.

Above is all the information about the ROS index in corporate financial reports. Hopefully through the above article, businesses will clearly understand what ROS is as well as its role and how to calculate this index most accurately. If you have any questions or need to use the overall business management support software 1C:Company Management, please contact 1C Vietnam via hotline for free consultation.