What is Sales to Operating Profit?
The Sales to Operating Profit ratio calculates the amount of revenue necessary to generate a dollar in operating income (EBIT).
How to Calculate Sales to Operating Profit Ratio
The sales to operating profit ratio compares a company’s net sales to its operating profit.
- Net Sales → The gross sales produced by a company minus any discounts, allowances, or returns.
- Operating Profit → The earnings remaining after the company’s cost of goods sold (COGS) and operating expenses (SG&A, R&D) are deduced from revenue.
Simply put, the sales to operating profit ratio is the approximate amount of revenue that a company must produce in order to generate a dollar in operating profit.
The metric is primarily used to set internal revenue targets so that the company can improve its operating profitability.
Sales to Operating Profit Ratio Formula
The formula for calculating the sales to operating profit ratio is as follows.
Sales to Operating Profit Formula
- Sales to Operating Profit = Net Sales ÷ Operating Profit
The inputs can be calculated using the following equations.
- Net Sales = Gross Sales – Returns – Discounts – Sales Allowances
- Operating Profit = Net Sales – COGS – Operating Expenses
By flipping the formula around, we’re left with the operating margin metric.
Operating Margin Formula
- Operating Margin = Operating Profit ÷ Net Sales
The operating margin shows how much of one dollar of revenue generated by a company flows down to the operating income (EBIT) line item.
Sales to Operating Profit Ratio — Excel Model Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Sales to Operating Profit Ratio Calculation Example
Suppose a company generated $50 million in gross sales in 2021, but there was a total of $10 million in deductions related to returns, discounts, and sales allowances.
Further, the company incurred $20 million in COGS and $10 million in SG&A.
- Gross Profit = $40 million – $20 million = $20 million
- Operating Profit = $20 million – $10 million = $10 million
Given those assumptions, our company’s gross profit is $20 million while its operating profit is $10 million.
|Gross Sales||$50 million|
|Less: Returns||($5 million)|
|Less: Discounts||($3 million)|
|Less: Sales Allowances||($2 million)|
|Net Sales||$40 million|
|Less: COGS||(20 million)|
|Gross Profit||$20 million|
|Less: SG&A||(10 million)|
|Operating Profit||$10 million|
By dividing the $10 million in operating profit by the $40 million in net sales, the operating margin comes out to 25%.
- Operating Margin = $10 million ÷ $40 million = 25%
In the final part of our exercise, we’ll calculate our company’s sales to operating profit ratio using the formula below, which results in a ratio of 4.0x.
- Sales to Operating Profit = $40 million ÷ $10 million = 4.0x
The 4.0x sales to operating profit ratio means that the company must generate $4.00 in revenue for its operating profit to be $1.00.