GMROI (Gross Margin Return on Inventory)
Definition
How many dollars of gross margin you earn for every dollar tied up in inventory. It shows which products make your inventory investment worthwhile.
Want a deeper explanation?
Formula
GMROI = Annual Gross Margin $ ÷ Average Inventory at CostGMROI combines margin and speed into one number. A high-margin product that sits for a year can be a worse investment than a lower-margin product that turns every month.
It is one of the best tools for deciding where your next purchase order dollars should go. Watch for: SKUs with a GMROI below 1.0, which earn less in margin each year than the cash they lock up.
Example
A SKU earns $90,000 of gross margin a year on $30,000 of average inventory, a GMROI of 3.0. Another earns $40,000 on $50,000, a GMROI of 0.8.