GMROI (Gross Margin Return on Inventory Investment) measures how much gross profit you earn per dollar of average inventory you carry. Two products can have identical margin percentages and very different GMROI if one turns over twice as fast, tying up capital for half as long.
GMROI Calculator
GMROI
2.50
Every $1 tied up in inventory generated $2.50 of gross profit
The GMROI formula
GMROI = Gross Margin ÷ Average Inventory Cost (at cost, not retail value). For example, a product line that generates $50,000 in gross margin over a year, carrying an average of $20,000 worth of that inventory at cost, has a GMROI of 2.5 — every dollar tied up in that inventory generated $2.50 of gross profit.
Use average inventory cost, not a single point-in-time snapshot: a common approach is (beginning inventory value + ending inventory value) ÷ 2 for the period you're measuring, valued at cost rather than retail price.
GMROI is most useful as a comparison tool across SKUs, categories, or suppliers, since it combines margin and inventory efficiency into one number a high-margin item that sits on the shelf for months can have a lower GMROI than a thin-margin item that turns over quickly.
See also: the GMROI glossary entry, the ABC analysis tool, the inventory turnover calculator.
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