Gross margin return on inventory investment (GMROI)
Also called GMROII
Reviewed by Dasha ShakovVP Marketing, Proton
Updated
What is GMROI?
Gross margin return on inventory investment (GMROI) is the gross profit a distributor earns for each dollar it has invested in inventory. GMROI = annual gross profit ÷ average inventory at cost, so a GMROI of 2.5 means every $1 of inventory produced $2.50 of gross profit in a year.
How it works
GMROI equals gross margin % × (annual sales ÷ average inventory at cost), so a low-margin item that sells quickly can beat a high-margin item that sits. Measure inventory as an average over the year and at cost, as for inventory turns, and be clear whether gross profit is before or after supplier rebates. It applies the idea of return on investment (ROI), what an investment earns relative to its cost, to the money held in stock.
GMROI example
Two product lines each sell $100,000 a year. One earns 40% margin on $40,000 of average inventory, a GMROI of 1.0; the other earns 20% on $10,000 of inventory, a GMROI of 2.0.
Related terms
- Gross marginGross margin is the share of sales a distributor keeps after paying for the goods it sold: gross margin % = (revenue − COGS) ÷ revenue.
- Inventory turnsInventory turns is the number of times a distributor sells through its average inventory in a year: annual COGS ÷ average inventory at cost.
- Inventory carrying costInventory carrying cost is the total cost of holding inventory over time: the cash tied up, space, insurance, taxes, handling, damage and obsolescence.
- ABC analysisABC analysis is a way of ranking inventory items by importance, such as sales or gross profit, and sorting them into classes A, B and C.
