From the course: Finance Foundations
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Common ratios: Return on sales, asset turnover, and ROE
From the course: Finance Foundations
Common ratios: Return on sales, asset turnover, and ROE
- Another common financial ratio is return on sales. Return on sales is a measure of a company's profitability. Return on sales is computed as net income divided by total revenue. For Walmart, return on sales is 2%, computed as $10 billion of net income divided by $500 billion in revenue. This means that if Walmart has sales of $100, the shareholders of Walmart get to keep $2 after all the expenses including interest and income taxes have been paid. This return on sales number is also sometimes called the profit margin. By comparison, Target's profit margin is a robust 4%. If we had the time, we could do an interesting item-by-item comparison of Walmart and Target to see why Walmart's return on sales is just half as large as Target's. Now for a high tech company such as Google or Apple or Microsoft, return on sales is often over 20%. The sales of high tech businesses can be very profitable. Businesses like Target and Walmart that sell groceries and commodities have a very thin margin.…
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