1. What is GMROI?

GMROI (Gross Margin Return on Inventory Investment) is a ratio that measures a company's ability to turn inventory into cash above the cost of the inventory. It evaluates how profitably inventory investments are being utilized.

2. How Does the Calculator Work?

The calculator uses the GMROI equation:

Where:

• \( GM \) — Gross Margin ($)
• \( AI \) — Average Inventory Cost ($)

Explanation: The equation calculates how many dollars of gross margin are returned for each dollar invested in inventory.

3. Importance of GMROI Calculation

Details: GMROI helps retailers and businesses evaluate inventory performance, identify profitable products, optimize stock levels, and make informed purchasing decisions.

4. Using the Calculator

Tips: Enter gross margin and average inventory cost in dollars. Both values must be valid (gross margin ≥ 0, average inventory cost > 0).

5. Frequently Asked Questions (FAQ)

Q1: What is a good GMROI ratio?
A: Generally, a GMROI above 1.0 is considered good as it indicates the business is earning more than its inventory investment. Higher values indicate better inventory performance.

Q2: How is gross margin calculated?
A: Gross Margin = Net Sales - Cost of Goods Sold. It represents the profit made after accounting for the direct costs of producing goods.

Q3: How is average inventory cost calculated?
A: Average Inventory Cost = (Beginning Inventory + Ending Inventory) / 2, valued at cost rather than retail price.

Q4: How often should GMROI be calculated?
A: GMROI should be calculated regularly (monthly or quarterly) to monitor inventory performance and make timely business decisions.

Q5: What are limitations of GMROI?
A: GMROI doesn't account for inventory carrying costs, seasonality, or product life cycles. It should be used alongside other inventory metrics for comprehensive analysis.