Team Member Guide

  Financial Structure Return On Sales

Generically, return on sales (ROS) is an efficiency measure defined asROS.

ROS asks “How hard are we working each dollar of sales?” This is a pure income statement relationship. However, if ROS is used alone, we could infer its effect upon the balance sheet and the financial structure.

  1. Profits. From the cumulative profit discussion, we know the company needs to expand its asset base to increase profits.
  2. But management wants a small sales base. If they have a smaller top line, and produce average profits, they can keep ROS high.
  3. Management will likely respond with a niche strategy: a) Playing in fewer segments lets them expand assets within the segments. For example, they could concentrate their starting products in low technology segments, or they could retire the low tech products and replace them with new, high tech products with the recovered capital. b) Similarly, sales will be near the overall industry average in a niche strategy. Although they give up some segments, they have higher sales in their target segments.
  4. Management will avoid debt, and move to retire existing debt to reduce interest payments.
  5. Plant investments will be relatively modest.
  6. Management is under no pressure to minimize assets, particularly current assets.


Cash $4,000 Accounts Payable $9,100 7.0%
Accounts Receivable $12,000 Current Debt $10,400 8.0%
Inventory $22,000 Long Term Debt $19,500 15.0%
Total Current Assets $38,000 Total Liabilities $39,000 30.0%
Plant and equipment $140,000 Common Stock $50,700 39.0%
Accum. Depreciation ($48,000) Retained Earnings $40,300 31.0%
Total Fixed Assets $92,000 Total Equity $91,000 70.0%
Total Assets $130,000 Total Liab. & O. E. $130,000 100.0%