Definition – What is GMROI (Gross Margin Return on Investment)?
GMROI measures an organization’s ability to turn inventory into cash in relation to the cost of the inventory.
Formula – How to calculate GMROI
GMROI = (Gross Margin $ / Average Inventory Cost) x 100%
GMROI = ((Annual Sales x (Gross Margin / 100%)) / Average Inventory Cost) x 100%
A store has a revenue of $500,000, gross margin of 30%, and average inventory cost of $100,000.
GMROI = (($500,000 x (30% / 100%)) / $100,000) x 100% = (($500,000 x 0.3) / $100,000) x 100% = ($150,000 / $100,000) x 100% = 1.5 x 100% = 150%
Therefore, this store has a GMROI of 150%.
Sources and more resources
- Investopedia – Gross Margin Return on Investment – GMROI – A simple explanation of GMROI.
- The Balance SMB – Calculate your gross margin return on inventory investment (GMROI) & How to calculate GMROI for a retail store – An pair of introductions to GMROI, how it is calculated, and how it can be used in a retail environment.
- The Retail Owners Institute – Getting through the retail maze with GMROI – Explains GMROI and gives some examples of how to use it to help make business decisions.