Return on Revenue (ROR)

Return on Revenue (ROR): Definition, Formula, and Use

Return on Revenue (ROR), also called net profit margin, measures the percentage of revenue that becomes net income. It shows how effectively a company turns sales into profit after accounting for all costs and expenses.

Key takeaways

• ROR = Net income ÷ Sales revenue (expressed as a percentage).
• It indicates how much profit a company earns for each dollar of revenue.
• Use ROR to assess management’s ability to generate sales and control expenses; combine it with other metrics for a fuller view.

How ROR is calculated

1. Obtain net income (bottom line on the income statement). This includes operating results, taxes, non-cash items (e.g., depreciation), and unusual gains or losses.
2. Obtain sales revenue (top line), or net sales after returns and discounts if reported that way.
3. Divide net income by sales revenue and multiply by 100 to express as a percentage.

Example formula:
ROR = (Net income / Sales revenue) × 100

What ROR tells you

ROR shows the portion of revenue that remains as profit after all expenses. A higher ROR means the company is retaining more profit per dollar of sales, reflecting good pricing, cost control, or a favorable product mix. A declining ROR can signal rising costs, pricing pressure, or inefficient operations.

Ways to improve ROR

• Increase revenue through higher prices, greater volume, or selling more profitable products.
• Reduce costs (production, SG&A, taxes, or other operating expenses).
• Change the sales mix toward higher-margin products or services.
• Example: If a store sells a glove for $80 with $16 profit (20% margin) and a bat for $200 with $20 profit (10% margin), shifting sales toward gloves raises overall ROR even if total revenue per item is lower.

ROR vs. Earnings Per Share (EPS)

• ROR measures profit relative to sales (operational efficiency).
• EPS measures profit per outstanding share (shareholder value per share).
  Both metrics are useful: ROR evaluates how well the business converts revenue to profit, while EPS shows how much profit is attributable to each share of common stock. Improvements in net income typically increase both metrics, but EPS is also affected by share count (e.g., buybacks or new issuance).

Example

For a company with $260 billion in revenue and $55.2 billion in net income:
ROR = ($55.2B / $260B) × 100 ≈ 21%

To judge whether 21% is good, compare to industry peers and to the company’s historical ROR trend.

Limitations and best practices

• ROR ignores a company’s balance sheet (assets, liabilities, leverage) and cash flow dynamics.
• One-time items, tax differences, or accounting choices can distort ROR in a given period.
• Use ROR alongside return on assets (ROA), return on equity (ROE), operating margin, and cash flow metrics for comprehensive analysis.

Conclusion

Return on Revenue is a straightforward profitability ratio that reveals how much of each sales dollar becomes profit. It’s a practical tool to evaluate pricing, cost control, and product mix decisions, but it should be used with other financial metrics to form a complete picture of a company’s financial health.