 Return on sales, which is sometimes called profit margin or sales margin, shows the percentage of each sales dollar that ends up in net income. Companies strive for high rates of return on sales. The higher the percentage, the more profit that's being generated by sales dollars. Return on sales is a measure of profitability. The most common formula for return on sales is calculated as net income divided by net sales revenue. Again, the higher the result, the higher the percentage of sales dollars that end up in the bottom line. A better way to calculate return on sales, though, is to take net income minus preferred stock dividends and then divide that by net sales revenue. This is because returns are calculated by and for the common shareholder. So deducting the amount of net income that goes to the preferred shareholders gives a better view of the return on sales for the common shareholder. Finally, some investors prefer to look at return on sales with operating income rather than net income. Since net income could include some one-time items like gain on sale of land, there's good rationale for focusing on operating income. Just make sure you don't compare operating income return on sales from one company to the net income return on sales to another company. Here is an income statement from our sample company. We'll use the highlighted net sales and net income to determine the return on sales. For 2016, net income divided by net sales revenue gives us a return of sales of 6.5%. The result of this ratio varies significantly by industry. Pharmaceutical companies will have much higher return on sales than food processors, for example. This result is much more comparable within its own industry.