Wall Street Prep

Sales to Operating Profit

Guide to Understanding the Operating Profit to Sales Ratio

Learn Online Now

Sales to Operating Profit

How to Calculate Sales to Operating Profit Ratio

The sales to operating profit ratio compares a company’s net sales to its operating profit.

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.

Submitting ...

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.

Financials 2021A
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.

Sales to Operating Profit Ratio Calculator

Step-by-Step Online Course

Everything You Need To Master Financial Modeling

Enroll in The Premium Package: Learn Financial Statement Modeling, DCF, M&A, LBO and Comps. The same training program used at top investment banks.

Enroll Today
Comments
guest
0 Comments
Inline Feedbacks
View all comments
X

The Wall Street Prep Quicklesson Series

7 Free Financial Modeling Lessons

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.