GMROI Calculator

How it works

GMROI (gross margin return on inventory investment) divides a year's gross margin dollars by the average amount of money held in inventory, valued at cost. A GMROI of 2.4 means each dollar of inventory earned $2.40 of gross margin over the year. Above 1, the year's gross margin exceeds the average inventory cost; below 1, it does not.

If you know sales, the gross margin percent and the inventory turnover instead, the same figure follows from them. Turnover at cost is cost of goods sold ÷ average inventory at cost, and cost of goods sold is sales × (1 − margin %), so GMROI = margin % × turnover ÷ (1 − margin %). Sales then only sets the dollar amounts; the ratio does not depend on it.

Benchmark GMROI figures differ by retail segment and are not built in. Enter your own target to see the gross margin it would take at your average inventory.

Formula

GMROI             = annual gross margin $ ÷ average inventory at cost
from turnover:    = margin % × turnover ÷ (1 − margin %)
gross margin $    = sales × margin %
average inventory = sales × (1 − margin %) ÷ turnover
margin for target = target GMROI × average inventory at cost

Example

A store earns $120,000 of gross margin in a year on an average inventory of $50,000 at cost. Its GMROI is $120,000 ÷ $50,000 = 2.40.

The same store described the other way: $300,000 of sales at a 40% gross margin with inventory turning 3.6 times a year at cost gives 0.40 × 3.6 ÷ 0.60 = 2.40, the same $120,000 of gross margin and the same $50,000 average inventory. A target GMROI of 3 would take $150,000 of gross margin at that inventory, $30,000 more.

Assumptions and limitations

• Gross margin and turnover are for a full year. A GMROI from a shorter period is not comparable with annual figures unless it is annualized.
• Average inventory is at cost, not at retail. A GMROI computed on inventory valued at retail prices is a smaller figure for the same business and is not comparable with this one.
• Gross margin here is before operating expenses such as rent, payroll and the cost of holding inventory, so a GMROI above 1 does not by itself mean the inventory is profitable.
• Two figures within one part in a billion of each other are treated as equal, so a gross margin equal to the inventory cost on paper reports a GMROI of exactly 1.
• Results are for informational and educational purposes and are not financial, tax or accounting advice.

Frequently asked questions