Net Income as a Percentage of Sales
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In the Financial Manager, this ratio indicates the reported net income after taxes and other expenses in relation to the revenue from sales.
This ratio indicates management's ability to operate the business with sufficient success to recover the cost of the goods or services, the expenses of operating the business (including depreciation), and the cost of borrowed funds, as well as to leave a margin of reasonable compensation to the owners for putting their capital at risk.
The ratio of net income to sales essentially expresses the overall cost and price effectiveness of the business. This ratio provides an indication of the buffer available in case of higher costs or lower sales in the future.
The calculation for this ratio is
where:
Net Income = Sales – (Cost of Sales + Expenses)
Sales = the sum of all Income account types
Cost of Sales = the sum of all Cost of Sales account types
Expenses = the sum of all Expense account types
Example
If sales are $100,000, cost of sales is $30,000, and expenses are $45,000, then net income is $25,000 and net income as a percentage of sales is 25%.
The calculation for this example is
