GMROI Calculator

How it is calculated

GMROI divides the gross profit earned over a period by the money tied up in stock over the same period:

GMROI = gross margin ($) / average inventory cost ($)

Gross margin is sales minus the cost of the goods sold, in currency, not a percentage. Average inventory must be valued at cost, not at retail price, and must be above zero. The result is shown as a ratio rounded to two decimals and as a dollar figure, which reads as gross profit per dollar of inventory. A value above 1 means the stock earned back more than it cost to hold; a negative gross margin gives a negative ratio.

Common mistakes

• Entering the gross margin percentage (such as 40) instead of the gross margin in dollars.
• Valuing inventory at retail price. It must be at cost, otherwise GMROI is understated.
• Using year-end inventory instead of the average over the period, which can be unusually high or low after seasonal buying or clearance.
• Using a margin figure for one period (say a quarter) with an average inventory figure for another, so the periods do not match.
• Comparing GMROI across very different categories without noting turnover speed; fast, low-margin goods and slow, high-margin goods can look equal.