After-Tax Return on Sales Definition

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After-Tax Return on Sales Definition

What Is After-Tax Return on Sales?

After-tax return on sales is a profitability metric that shows how well a firm utilises its sales revenue.

A high after-tax return on sales indicates that the company is well-run, while a low number indicates inefficiency and may be a warning indication of approaching financial trouble.

Key Takeaways

  • After-tax return on sales is a profitability metric that shows how efficiently a firm spends its sales revenue.
  • It is computed by dividing the company’s net income after taxes by its total sales revenue.
  • Companies having a better after-tax return on sales pay less tax and operate in sectors with larger profit margins.
  • Profit-margin requirements vary greatly by industry, therefore this ratio should only be used to compare firms within the same industry.

Understanding After-Tax Return on Sales

Companies love to brag about how much money they make, but a more important indicator is how much money they have left after subtracting all expenditures. High revenue is nothing to brag about if the expense of getting that cash is about the same.

Keeping a sizable portion of overall revenues demonstrates the strength of the business model and convinces investors that there will be enough left over to maintain and grow assets, defend against competitive challenges, seek acquisitions, and return money to shareholders. After-tax return on sales is one of the indicators used by investors to assess how much of a company’s income remains after all bills are paid.

Calculating After-Tax Return on Sales

After-tax return on sales is determined by dividing the company’s after-tax net income, which is the amount of money left over after deducting all expenditures such as taxes, operating expenses, interest, and preferred stock dividends, by total sales revenue. The final amount will be a percentage when multiplied by 100: the greater the percentage, the more effectively the firm utilises its sales income.

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Companies having a better after-tax return on sales pay less tax and operate in sectors with larger profit margins. Profit margin is the percentage of a company’s revenue that is recognized as a profit rather than spent as a cost. For example, if a firm has a 20% profit margin in the most recent quarter, it indicates that it earned 20 cents on every dollar of sales.

Profit margins are determined by various variables, including how much it costs a company to create sales, develop demand for the product or service, and market competition. Because fewer businesses compete for the same amount of client demand, industries with less competition tend to have larger profit margins. With more competition, the demand to cut prices increases, putting a strain on profitability.

One of numerous profitability measures given by corporations, net profit margin, accounts for all expenditures, including taxes and one-time charges.

Taxation is also an essential consideration here. Because the statistic takes into account how much a firm must pay the government in taxes, after-tax return on sales will be lower in higher-tax areas. By 2020, forty-four states will have a corporate income tax, with rates ranging from 2.5% in North Carolina to 12% in Iowa.

How After-Tax Return on Sales Can Vary

Pharmaceutical and biotechnology businesses had the highest after-tax return on sales in the S&P 500, followed by energy and exploration industries and software and software-related services. Consumer basics, which sell necessary items such as those offered by supermarkets, often have the lowest after-tax sales returns in the United States.

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After taxes and operational expenditures, Apple (APPL) recorded a net income of $57.4 billion in 2020. When that percentage is divided by their global net sales of $274.5 billion, the after-tax return on sales is 20.9%. In the same year, General Motors (GM) declared a net income of $6.4 billion. When divided by $122 billion in sales revenue, the after-tax return on sales is 4.5%.

Special Considerations

Investors may evaluate various firms in the same sector using after-tax return on sales. Aside from that, this profitability ratio is often of little utility.

Because each industry has various cost structures and degrees of competition, profit margin criteria might vary greatly based on the sort of firm you are looking at. In other words, it would be absurd to compare an automotive manufacturer’s after-tax profit margin to that of a clothes shop.

It’s also worth mentioning that a single profitability ratio only represents a tiny portion of a company’s entire financial success. Investors can analyze other indicators such as return on assets or return on capital employed to gain a more accurate and comprehensive view of a company’s financial health. Examining various financial data helps to develop a more comprehensive picture of a company’s health and highlights faults that certain measures may overlook.

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