GMROI (pronounced ‘JIMROY’) stands for Gross Margin Return On Investment and is one of many metrics used in determining overall performance. Specifically, it shows how profitable inventory is over a certain period of time, usually a year.
GMROI is usually expressed as a ratio, e.g. 1.25, and the higher the ratio, the more profit there is to be had from the inventory being held. It also signifies the inventory is working efficiently, as total gross margin dollars are higher than the average inventory value at cost at the end of the period being calculated.
The calculation for GMROI involves having to calculate gross margin and dividing this figure into the average inventory value at cost.
Gross Margin / Average Inventory at Cost = GMROI
What does GMROI show?
Compared to a straight gross margin figure, which also gives a view on performance, GMROI shows how profitable inventory is rather than just how much profit has been achieved from sales.
If a retailer’s total annual sales, excluding any taxes, is $300,000, and COGS is $140,000, then their profit or margin value is $160,000.
If the average value of inventory the retailer has had through the year is $50,000, the GMROI for the retailer would be 3.20. This means the retailer earns 3.20 times more than what it cost to buy the inventory. Calculated as:
$160,000 / $50,000 = 3.20
Alternatively, if the retailer’s total annual sales, excluding any taxes, is $160,000 and COGS & Average Inventory remain the same, with COGS at $140,000, gives a profit or margin value of $20,000 & Average Value of Inventory through the year at $50,000, the GMROI for the retailer would be 0.40, meaning the retailer is earning less than what it cost to buy the inventory.
$20,000 / $50,000 = 0.40
Average inventory at cost is used in calculating GMROI, as it is the amount paid by the retailer to purchase the inventory and so the retailer knows what their return is for the amount spent on inventory.
GMROI Points of Interest:
- The most common timeframe used to calculate GMROI is a year, however this can vary depending on each retailer’s preference.
- GMROI can be calculated by product, category, department or overall business, across differing timeframes.
- It stands as a useful metric that provides additional data to make better costing, pricing, and inventory purchasing decisions depending on the position of the decision-maker.
Pro-tip on GMROI:
To prevent having to constantly calculate GMROI, a commonly adopted practice is to have the GMROI calculation added to budgeting and forecasting documents, as the figures needed for the calculation – margin and inventory – can be found on these documents.