Gross Margin Return On Investment (GMROI)
An inventory profitability evaluation ratio that analyzes a firm's ability to turn inventory into cash above the cost of the inventory. It is calculated by dividing the gross margin by the average inventory cost and is used often in the retail industry. To illustrate:
Gross margin return on investment is also know as the "gross margin return on inventory investment" (GMROII). Investopedia Says:
This is a useful measure as it helps the investor, or management, see the average amount that the inventory returns above its cost. A ratio higher than 1 means the firm is selling the merchandise for more than what it costs the firm to acquire it. The opposite is true for a ratio below 1.
For example, say a firm has a gross margin of $129,500 and an average inventory cost of $83,000. This firm's GMROI is 1.56, which means it earns revenues of 156% of costs. Related Terms:
Carrying Cost Of Inventory
Cash Return On Capital Invested - CROCI
Cost Of Goods Sold - COGS
First In, First Out - FIFO
Gross Margin
Highest In, First Out - HIFO
Inventory
Inventory Turnover
Investment
Last In, First Out - LIFO |