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 is getting $0.75 in gross margin for every dollar invested in inventory. This means that company XYZ is selling the merchandise for less than its acquisition cost. In comparison to company XYZ, company ABC may be a less ideal investment based on the GMROI.

Beginning Inventory
Beginning inventory is the book value of inventory at the start ... 
Inventory Turnover
Inventory turnover is a ratio showing how many times a company ... 
Cost of Goods Sold  COGS
Cost of goods sold (COGS) is the direct costs attributable to ... 
Gross Profit Margin
A gross profit margin is a financial metric used to assess financial ... 
Periodic Inventory
The periodic inventory system is a method of inventory valuation ... 
Perpetual Inventory
Perpetual inventory is a method of accounting for inventory that ...

Investing
How to Calculate Average Inventory
Average inventory is the median value of an inventory at a specific time period. 
Investing
Key Financial Ratios for Retail Companies
Using the following liquidity, profitability and debt ratios, an investor can gather deeper knowledge of a retail company's shortterm and longterm outlook. 
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
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. 
Investing
Tesla's 3 Key Financial Ratios (TSLA)
Learn about Tesla Motors, Inc. and the company's key financial ratios, such as gross margin, operating margin and inventory turnover ratio. 
Investing
Understanding Periodic vs. Perpetual Inventory
An overview of the two primary inventory accounting systems. 
Managing Wealth
What’s a Good Profit Margin for a New Business?
Surprisingly, the younger your company is, the better its numbers may look. 
Investing
Key Financial Ratios for Manufacturing Companies
An investor can utilize these financial ratios to determine whether a manufacturing company is efficient, profitable and a good longterm investment option. 
Investing
Is Sales Growth Weaker Than Inventory Growth?
Find out why Goldman Sachs Equity Research is concerned about inventory growth, which appears to be outpacing sales growth for many U.S. sectors. 
Investing
Ratio Analysis
Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...

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 >> 
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 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 >> 
How do gross profit and gross margin differ?
Both gross profit and gross margin measure how profitable a company is during a given period, but each shows profitability ... Read Answer >> 
How to calculate the inventory turnover ratio?
The inventory turnover ratio is a key measure for evaluating how effective a company's management is at managing inventory ... Read Answer >>