Creation of the Measure
Average Return on Sales (ROS), which is sometimes referred to as profit margin, is an efficiency measure calculated by dividing a company's operating profit by its net sales during a specified accounting period (Beny, 2019, p. 118). This computation gives the measure as a ratio. It is possible to express the ratio as a percentage by multiplying it by 100%. The operating profit of a company is calculated by subtracting operating expenses from the value of revenue generated.
Implication of Ending Stock Price
ROS shows how a company generates profit from its products and services. Beny (2019, p. 117) explains that ROS is a financially relevant measure used to evaluate a company's operational efficiency because it provides insight into the amount of profit a company receives for every unit sold. This is because the measure shows the percentage of sales that cover operating expenses and the percentage that contributes to the company's profit (Bayaraa, 2017, p. 22). Such information may inform many managerial decisions.
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The measure also informs vital stakeholders about a company’s production process and managerial functionality. This is possible because stakeholders trust managers to minimize operating costs in the production costs and increase sales to raise business income. By displaying these, the measure informs investors and creditors, and other financiers who rely on business efficiency as their basis for financing decisions (Bayaraa, 2017, p. 26). Thus, ROS indicates both efficiency and profitability; and this informs financiers about the potential dividends they will receive if they invest in the company.
Comparison with CAPSIM
Andrews team maintained a progressively increasing ROS through all the competition rounds. Having started at a loss of 2.8% in the first competition round, the company continued to improve efficiency as its ROS increased from 3.6% in the second competition round to 10.3% in the sixth round ( CAPSIM, 2021) . In the seventh round, however, the company's ROS reduced slightly to 8.94%. These good statistics are an excellent pointer to increasing business efficiency marked by decreasing costs and increasing sales.
Compared with competitors, the Andrews team is one of the most profitable companies in the industry. Having recorded a progressively increasing ROS through the rounds is a positive marker. Nonetheless, the company was outdone by other companies like Erie and Chester, whose ROS measures in the seventh round were 9.97% and 9.29%, respectively ( CAPSIM, 2021 ). Therefore, there is a need for the company’s management to strive to improve its efficiency through increasing sales and reducing business expenses. This will increase its ROS measure.
References
Bayaraa, B. (2017). Financial performance determinants of organizations: The case of Mongolian companies. Journal of Competitiveness , 9 (3), 22-33. https://doi.org/10.7441/joc.2017.03.02
Beny, B. (2019). Pengaruh return on assets, return on sales, earning per share, current ratio, debt to equity ratio, total assets turnover, price earnings ratio, Dan Kebijakan Dividen terhadap Harga Saham pada Perusahaan Indeks LQ45 periode 2009-2017. Jurnal Pasar Modal dan Bisnis , 1 (2), 117-126. https://doi.org/10.37194/jpmb.v1i2.25
CAPSIM. (2021). Industry C124451_012 selected statistics for round 6 . Retrieved May 23, 2021, from https://ww3.capsim.com/student/portal/index.cfm?template=dashboard.selectedstatistics&simid=C124451_012&round=6&rdtype=2&edition=Capstone
