What it is:

This ratio compares after tax profit to sales. It can help you determine if you are making enough of a return on your sales effort.

When to use it:

If your company is experiencing a cash flow crunch, it could be because its mark-up is not enough to cover expenses. Return on sales can help point this out, and allow you to adjust prices for an adequate profit. Also, be sure to look for trends in this figure. If it appears to be dropping over time, it could be a signal that you will soon be experiencing financial problems.

The formula:

Net profit divided by sales.

Calculate your return on sales ratio:

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