What is Return on Revenue?
Return on revenue (ROR) is a pivotal measure of company profitability, determining how much profit is generated from each dollar of revenue. It provides critical insight into how effectively a company’s management team is at generating sales and controlling expenses.
Key Highlights:
- ROR measures profitability based on the revenue generated.
- It compares the net income for each dollar of revenue.
- Essential for evaluating the efficiency and effectiveness of management.
Unveiling the Significance of ROR
Return on revenue showcases the percentage of profit derived from revenue. Revenue is the top-line metric reflecting total income from sales of goods and services. Net income, the residual profit after subtracting all costs and expenses, highlights the company’s efficiency in converting sales into actual profit.
The Calculation
Formula: ROR = (Net Income / Sales Revenue)
By dividing the net income by the sales revenue and multiplying by 100, you get the percentage that illustrates profitability efficiency.
What Does ROR Reveal?
ROR, also known as net profit margin, is instrumental for investors aiming to measure profitability against sales while factoring in operational and overhead costs. It helps in evaluating the progress of managerial strategies and operational efficiency.
- Increased revenue and controlled expenses positively impact ROR.
- Analyzing ROR trends aids in understanding the financial health of a company over time.
- ROR helps compare profitability across the same industry.
Real-World Application: Increased Profit through Strategy
Imagine a sporting goods store deciding between focusing on selling baseball gloves or bats. Gloves generating a 20% profit margin earn more profit per sale compared to bats with a 10% margin. By marketing and selling more gloves, ROR improves thanks to higher net income relative to sales.
ROR In Action: EPS Comparison
Comparing Return on Revenue with Earnings Per Share (EPS) reveals differences in metrics. While EPS examines profitability through stock performance, ROR strictly focuses on sales revenue and profitability.
When actions targeted at increasing ROR are implemented (like cost-reduction strategies), EPS naturally increases as well, showing overall employee productivity and strategic efficiency.
Example:
If a business with 100,000 shares boasts a $1 million annual net income, its EPS is $10/share. An increment in net income to $1.2 million, keeping the shares constant, means an EPS of $12/share. A higher ROR further strengthens the profitability scenario.
Real World Example: Apple’s Return on Revenue
For Fiscal Year ending Sept. 28, 2019:
- Net Sales: $260 billion
- Net Income: $55.2 billion
Calculating ROR:
- Return on Revenue = ($55.2 billion / $260 billion) x 100 = 21%
By comparing it with industry counterparts and analyzing its trend over multiple periods, investors can gain robust insight into Apple’s ongoing and historical profit efficiency.
Interpreting ROR enables an investor to gauge not only current profitability but also predict long-term potential through strategic managerial practices.
Related Terms: Net Income, Revenue, Net Profit Margin, Earnings per Share (EPS), Financial Performance.
References
- U.S. Securities and Exchange Commission. “Apple Inc. Form 10-K for the Fiscal Year Ended September 28, 2019”.
