The gross margin return on investment (GMROI) is an inventory profitability calculation that looks at your company's ability to actually make profit from the sales of inventory. It is calculated by dividing the gross margin by the average inventory value.
The GMROI is particularly useful for determining the profit you're making beyond inventory cost. If a product is selling at a high volume but barely making a profit as shown by GMROI, you may be losing money when you factor in all of your other operational costs.
GMROI = Gross Profit / Average Inventory Value
Gross profit is the gross profit as calculated by revenue compared to your COGS (Cost of Goods Sold). Your inventory management system can help you to accurately calculate COGS.
Average Inventory Value is the average cost of inventory over a time period. At the simplest, you can calculate average inventory value by taking the average of the stock value at the start of the time period and at the end of the time period. For a more accurate reflection of average inventory value, you can also take the monthly average of inventory value across the time period.
As an example, Company A has an average of $100,000 of stock over the last year and has made a gross profit of $250,000.
Using our above formula:
GMROI = 250,000 / 100,000
Company A’s GMROI is 2.5. This means that Alpha made $2.5 for every dollar spent on stock.
A ratio higher than one means the firm is selling the merchandise for more than what it costs the firm to acquire it and shows that the business has a good balance between its sales, margin, and cost of inventory. The opposite is true for a ratio below 1. Some sources recommend the rule of thumb for GMROI in a retail store to be 3.2 or higher so that all occupancy and employee costs and profits are covered.
Easy Insight automates the process of calculating GMROI so that you don't need to build your own spreadsheets. You can look at GMROI across your entire business, by brand, category, or anything else, or all the way down to the SKU level, all without cumbersome spreadsheets. Once you've connected Easy Insight to your inventory management system, the prebuilt dashboard includes the following reports to help with inventory turnover:
Once you've connected Easy Insight to your inventory management system, the prebuilt dashboard includes a chart of your GMROI.
You can click on any month in the chart to dive into details about the GMROI. You can dig into GMROI by product category, brand, or other fields:
Want to learn about other inventory metrics? See Inventory Metrics for other ways to help measure and improve your business.
