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GMROI calculator
GMROI, gross margin return on inventory investment, is gross margin divided by average inventory at cost. A GMROI of 2.0 means each dollar of inventory returned two dollars of gross margin.
- GMROI
- 2.25
- Gross margin
- $360,000
- Gross margin %
- 40%
Each $1 of inventory at cost returned $2.25 of gross margin.
Working
- Gross margin: $900,000 − $540,000 = $360,000
- GMROI: $360,000 ÷ $160,000 = 2.25
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The formula
GMROI = (net sales − COGS) ÷ average inventory at cost
How it works
Margin percentage alone does not tell you whether stock is earning its keep. A high-margin product that sits on the shelf for a year can be a worse use of cash than a thinner-margin product that turns fast. GMROI combines the two.
It is most useful per category or supplier, to decide where to put the next dollar of buying budget and which lines to cut back.
Worked example
Net sales $900,000, COGS $540,000, so gross margin is $360,000 (40%). Average inventory at cost is $160,000. GMROI = 360,000 ÷ 160,000 = 2.25.
Watch out for
- Use inventory at cost, not at retail price.
- Use average inventory over the period, not a single snapshot.
- Gross margin should be after discounts and returns, and consistent with how you calculate COGS.
Frequently asked questions
What is a good GMROI?
How is GMROI different from margin?
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