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What is GMROI and how does it help a retailer judge inventory?
GMROI, gross margin return on inventory investment, is gross margin divided by average inventory cost over a period. It shows how many currency units of gross profit each unit of money tied up in stock earns, helping compare products or categories.
Formula in words: gross margin in currency units divided by average inventory at cost.
A result above 1 means the stock earned more gross margin than it cost to hold, before other expenses. A fast-selling low-margin item can beat a slow high-margin one.
Commonly misread:
- Using retail value for inventory in the denominator rather than cost.
- Using year-end stock instead of an average, which distorts seasonal businesses.
- Treating it as profit, when overheads have not yet been deducted.
Use it to rank categories and decide where to invest more purchasing budget.
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