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A return on revenue, or ROR, is a means of measuring the profitability of a business, using a relatively simple formula. By dividing the net income by the amount of revenue, it is possible to determine the impact that expenses have on the bottom line of the business. This approach is often used in comparing the changes in profitability that occur from one period to another, such as with a year to year analysis.
The goal of most companies is to increase the amount of profitability from one period to the next. While considering net income alone provides some idea of whether this goal is being attained, it does not provide the entire picture. By dividing net income by revenue, it is possible to allow for the expenses incurred during that period and determine how much of an impact those expenses had on that income. In other words, the company can use this approach to determine if the return on income has increased, remained the same, or decreased since the previous period or in comparison to the same period last year or even five years ago.
What business owners hope to see is a trend indicating at least an incremental increase in the return on revenue. When the figures indicate an increase over the last period, it implies that company expenses are being managed efficiently and that the business is actually generating more net profit. Should the figures indicate that the return on revenue has decreased, this is often a sign that expenses are not being managed with the same degree of efficiency as in times past. This data can lead to identifying where expenses can be minimized without damaging the quality of the goods or resulting in production levels that are below the amount needed to meet consumer demand. Assuming that the proper strategies are implemented, the return on revenue for the next period will likely improve.
Many companies compare the return on revenue from one annual period to the next. In some industries, this type of comparison may take place semi-annually, allowing the business to compare one six month period with the previous six months, or compare a time frame in the current year with the same period in the previous year. With any of these applications, calculating the return on revenue makes it easier to determine if the company is moving forward or if there is some aspect of the business operation that needs to be addressed before additional declines take place.
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