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GMROI Calculator

Business planning calculators

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.

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