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# GMROI Calculator ## What is GMROI?

Gross Margin Return on Investment (GMROI) is a widely-used metric for evaluating a company's inventory profitability. In other words, GMROI helps determine how efficiently a company can leverage its inventory to generate gross profit. This indicator is particularly useful for retail businesses that invest a large portion of their capital in inventory. A GMROI higher than one means that the company is making a profit on its inventory. The higher the GMROI, the better, with a GMROI of 3.2 often considered a good indicator for retail stores.

## How to use a GMROI Calculator

To calculate the GMROI, the following steps are required:

1. Calculate the gross profit: This is obtained by subtracting the cost of goods sold from net sales.

2. Calculate the average inventory cost: This is the average of the beginning and ending inventory during a specific period.

3. Divide the gross profit by the average inventory cost to obtain the GMROI.

By following these steps, you can calculate the gross margin return on investment for a company's inventory.

## Actual Example to Demonstrate the Calculator

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

• Net sales: \$400,000

• Cost of sold goods: \$250,000

• Beginning inventory: \$40,000

• Ending inventory: \$60,000

With this information, we can calculate the GMROI as follows:

1. Calculate the gross profit: \$400,000 (net sales) - \$250,000 (cost of sold goods) = \$150,000

2. Calculate the average inventory cost: (\$40,000 + \$60,000) / 2 = \$50,000

3. Calculate the GMROI: \$150,000 (gross profit) / \$50,000 (average inventory cost) = \$3

In this example, the GMROI equals \$3, which 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.