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:
BREAKING DOWN 'Gross Margin Return On Investment  GMROI'
Gross margin return on investment is also know as the gross margin return on inventory investment (GMROII).The gross margin 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.
Interpretation
The GMROI 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.
Gross Margin Return on Investment Examples
For example, assume luxury retail company ABC has 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% and 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. Therefore, company ABC is selling the merchandise for more than its acquisition cost.
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. Therefore, it earns revenues of 75% of its costs and has an unfavorable GMROI. Additionally, company XYZ is selling the merchandise for less than its acquisition cost and is operating at a loss. In comparison to company XYZ, company ABC may not be a favorable investment based on the GMROI.

Average Inventory
A calculation comparing the value or number of a particular good ... 
Days Sales Of Inventory  DSI
A financial measure of a company's performance that gives investors ... 
Carrying Cost Of Inventory
This is the cost a business incurs over a certain period of time, ... 
Adjusted Gross Margin
A calculation used to determine the profitability of a product, ... 
Ending Inventory
The value of goods available for sale at the end of the accounting ... 
Gross Profit Margin
A financial metric used to assess a firm's financial health by ...

Investing
Why GMROI is Important
Gross margin return on investment, or GMROI, analyzes a firm’s ability to turn inventory into profit. 
Investing
How to Analyze a Company's Inventory
Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory. 
Investing
Days Sales of Inventory
Days Sales of Inventory, also called Days Inventory Outstanding, is a key financial measurement of a company's performance pertaining to inventory management. In simple terms, it tells how many ... 
Investing
How to Calculate Average Inventory
Average inventory is the median value of an inventory at a specific time period. 
Investing
Measuring Company Efficiency
Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period. 
Investing
Explaining Carrying Cost of Inventory
The carrying cost of inventory is the cost a business pays for holding goods in stock. 
Investing
Inventory Valuation For Investors: FIFO And LIFO
We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line. 
Investing
What is Involved in Inventory Management?
Inventory management refers to the theories, functions and management skills involved in controlling an inventory. 
Investing
Reading The Inventory Turnover
Inventory turnover is a ratio that shows how quickly a company uses up its supply of goods over a given time frame. Inventory turnover may be calculated as the market value of sales divided by ... 
Investing
The Difference Between Gross and Net Profit Margin
To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.

How do you analyze inventory on the balance sheet?
Learn how to analyze inventory using financial statements and footnotes by doing ratio analysis and performing qualitative ... Read Answer >> 
What does inventory turnover tell an investor about a company?
Find out more about the inventory turnover ratio, what the ratio measures and what the inventory turnover ratio indicates ... Read Answer >> 
Why is it sometimes better to use an average inventory figure when calculating the ...
For a couple of key reasons, average inventory can be a better and more accurate measure when calculating the inventory turnover ... Read Answer >> 
What is the formula for calculating inventory turnover?
Learn about the inventory turnover ratio, how it is calculated and what this efficiency metric tells businesses about their ... Read Answer >> 
What is the difference between revenue and cost in gross margin?
Discover the differences between revenue and cost in gross margin, along with an explanation of various measures of profitability. Read Answer >> 
Why should investors care about the Days Sales of Inventory (DSI)?
Learn about days sales of inventory and what it measures; understand why an investor would want to know a company's days ... Read Answer >>