Gross Margin Return On Investment - GMROI

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What is a 'Gross Margin Return On Investment - GMROI'

A 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. To illustrate:

 

Gross Margin Return On Investment (GMROI)

Gross margin return on investment is also know as the "gross margin return on inventory investment" (GMROII).

BREAKING DOWN 'Gross Margin Return On Investment - GMROI'

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.

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