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Gross Margin Return on Investment (GMROI): A measure of the profitability of inventory investment, calculated by dividing gross profit by average inventory investment.
Gross Margin Return on Investment (GMROI) is a financial performance metric used to measure the profitability of a company's inventory investment. It provides insight into how effectively a company is using its resources to generate profit. GMROI is calculated by dividing the gross profit by the average inventory investment during a specific period.
The formula for calculating GMROI is:
GMROI = Gross Profit / Average Inventory Investment
Gross profit is calculated by subtracting the cost of goods sold from the revenue generated by the sale of those goods. Average inventory investment is calculated by adding the beginning and ending inventory balances for a period and dividing by two.
A high GMROI indicates that a company is generating significant profits relative to its inventory investment, while a low GMROI suggests that a company's inventory investment is not generating a significant return. In general, a GMROI greater than 1 indicates that a company is generating more gross profit than the cost of its inventory investment.
GMROI can be used to evaluate the profitability of a company's inventory at both the individual product level and the overall inventory level. By analyzing the GMROI of individual products, a company can identify which products are contributing the most to its profitability and focus on those products. Conversely, by identifying products with a low GMROI, a company can make informed decisions about whether to discontinue the product or adjust its pricing and promotional strategies.
Overall, GMROI is an important metric for businesses that want to optimize their inventory management and maximize profitability. By tracking GMROI over time, a company can identify trends and make adjustments to its inventory management strategies to improve its financial performance.