How this calculator works
Gross margin return on inventory answers how many dollars of gross margin each dollar of inventory at cost produces during a period. Average the opening and closing inventory at cost, then divide gross profit by that average. A GMROI of 2.00 means each inventory dollar returned two dollars of gross margin. Because it combines margin and stock turn, GMROI is useful for comparing products or departments with different prices and turnover rates.
Formula
Average inventory = (opening inventory + closing inventory) / 2. GMROI = gross profit / average inventory. The percentage form multiplies by 100.
Worked example
Opening inventory of $40,000 and closing inventory of $60,000 average $50,000. Gross profit of $30,000 gives a GMROI of 0.60, or 60%: each inventory dollar produced 60 cents of gross margin in the period.
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Frequently asked questions
What is a good GMROI?
It depends on the sector and the period. Grocery and other fast-turn retail often target higher values than furniture or jewellery. Compare the same business across periods and products, and check that gross profit and inventory cover the same period.
Should inventory be at cost or at retail?
Use cost, because gross profit is already measured after cost of goods sold and GMROI should relate margin to the money tied up in stock. A retail-value version measures a different thing and should be labelled separately.
How is GMROI related to stock turn?
GMROI is roughly gross margin percentage times inventory turnover. A product can earn a high GMROI with a thin margin and fast turnover, or with a fat margin and slow turnover. Both routes are valid, which is why the single ratio is useful.