📈GMROI Calculator (Gross Margin Return on Investment)

We designed this GMROI calculator to help you calculate your gross margin return on inventory.

Are you wondering about the efficiency with which your company transforms inventory into gross profit? Then you're at the right place. GMROI is a powerful performance measurement tool you can use to determine the profitability of your inventory. This article contains information about:

• What GMROI is
• How to calculate GMROI
• What is a good GMROI indicator
• How to use the GMROI indicator
• And more!

What is GMROI? Gross Margin Return on Inventory

Gross margin return on investment (GMROI) is a widely used metric for evaluating the inventory's profitability. In other words, GMROI determines how efficiently you can leverage your company's inventory for gross profit.

How can you use the GMROI index? Companies, especially retail establishments, invest much of their capital in inventory. GMROI calculation will guide you in understanding if your inventory is profitable and deciding if making changes (e.g., the price and quantity adjustment of the product) may increase your margins. Keep reading to find out what a good GMROI is.

What is a Good GMROI?

In general, GMROI higher than one means that the company is making a profit on inventory. Consequently, the higher the GMROI indicator is, the better. Although, as a rule of thumb, some consider a GMROI of 3.2 a good indicator for retail stores. On the other hand, a GMROI lower than one means that margins are too low. If you want to improve your inventory management, be sure to implement accounting methods presented at FIFO calculator or LIFO calculator.

The GMROI metric helps businesses identify which products or categories generate the best returns on their inventory investment. By tracking GMROI over time, companies can make informed decisions about pricing strategies, inventory levels, and product mix optimization.

How to Calculate GMROI

The GMROI formula is quite simple. To compute the indicator, you need to perform the following calculations:

where:

• The gross profit equals net sales minus the cost of sold goods.
• The average inventory cost is the average of the beginning and ending inventory.

Let's bring an example of a hypothetical company, Alpha, with the following information:

• Gross profit: $150,000
• Average inventory cost: $50,000

In this case, GMROI equals $150,000 ÷ $50,000 = 3. This means that the business makes $3 in gross profits for every dollar spent on inventory. We can also say this company earns gross profits of 300% of the inventory costs.

Are you interested in how fast your company sells its inventory in a certain period? Then check out our inventory turnover calculator.

How to Use the GMROI Calculator

Our GMROI calculator simplifies the process of calculating your gross margin return on investment. Follow these steps:

1. Enter your Net Sales: Input your total net sales revenue for the period (after returns, discounts, and allowances).
2. Enter your Cost of Goods Sold (COGS): Input the direct costs attributable to the production of goods sold.
3. Enter your Beginning Inventory: Input the value of inventory at the start of the analysis period.
4. Enter your Ending Inventory: Input the value of inventory at the end of the analysis period.

The calculator will automatically compute your Gross Margin, Gross Margin Percentage, Average Inventory, and GMROI, along with an interpretation of your results to help you understand your inventory profitability.

Ways to Increase GMROI Indicator

There are several ways to increase your GMROI measure, some of which include:

• Raising the prices of your goods: Increasing product prices can improve gross margin without changing inventory investment.
• Decreasing inventory investment: Reducing the amount of capital tied up in inventory while maintaining sales can improve GMROI.
• Minimizing your costs, such as raw material costs: Lowering COGS increases gross margin and improves GMROI.
• Improving your inventory turnover by keeping your inventory levels constant and increasing sales volume: Selling more products with the same inventory investment improves efficiency.

By implementing these strategies, businesses can optimize their inventory management and improve their overall profitability.

Difference Between DIO and GMROI

Days inventory outstanding (DIO) is a measure that indicates the duration necessary for a company to turn its inventory into sales. On the other hand, gross margin return on investment (GMROI) is a metric to determine how efficiently you can leverage your company's inventory for gross profit.

While DIO focuses on the speed of inventory conversion to sales, GMROI focuses on the profitability of that inventory. Both metrics are valuable for inventory management, but they measure different aspects of inventory performance.