what is the gross margin return on investment gmroi 
the gross margin return on investment gmroi is 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 gmroi is also known as the gross margin return on inventory investment gmroii investopedia nono floresunderstanding the gross margin return on investment gmroi the gmroi is a useful measure as it helps the investor or manager see the average amount that the inventory returns above its cost a ratio higher than one means the firm is selling the merchandise for more than what it costs the firm to acquire it and shows that the business has a good balance between its sales margin and cost of inventory the opposite is true for a ratio below 1 some sources recommend the rule of thumb for gmroi in a retail store to be 3 2 or higher so that all occupancy and employee costs and profits are covered the formula for the gmroi is as follows gmroi gross profitaverage inventory cost mathit gmroi frac text gross profit text average inventory cost gmroi average inventory costgross profit to calculate the gross margin return on inventory two metrics must be known the gross margin and the average inventory the gross profit is calculated by subtracting a company s cost of goods sold cogs from its revenue the difference is then divided by its revenue the average inventory is calculated by summing the ending inventory over a specified period and then dividing the sum by the number of periods while considering the obsolete inventory portion scenarios as well for example assume luxury retail company abc has a total revenue of 100 million and cogs of 35 million at the end of the current fiscal year therefore the company has a gross margin of 65 which means it retains 65 cents for each dollar of revenue it has generated the gross margin may also be stated in dollar terms rather than in percentage terms at the end of the fiscal year the company has an average inventory cost of 20 million this firm s gmroi is 3 25 or 65 million 20 million which means it earns revenues of 325 of costs company abc is thus selling the merchandise for more than a 3 25 markup for each dollar spent on inventory assume luxury retail company xyz is a competitor to company abc and has total revenue of 80 million and cogs of 65 million consequently the company has a gross margin of 15 million or 18 75 cents for each dollar of revenue it has generated the company has an average inventory cost of 20 million company xyz has a gmroi of 0 75 or 15 million 20 million it thus earns revenues of 75 of its costs and is getting 0 75 in gross margin for every dollar invested in inventory this means that company xyz is making only 0 75 cents for each 1 spent on inventory which is not enough to cover business expenses other than inventory such as selling general and administrative expense sg a marketing and sales for that xyz margins are sub standard in comparison to company xyz company abc may be a more ideal investment based on the gmroi 