GMROI: formula, example and what a good number looks like

GMROI, or gross margin return on inventory investment, tells you how many dollars of gross margin you earn for every dollar you hold in stock. It is one of the most useful numbers for deciding where a retailer or distributor should put its cash.

The GMROI formula

GMROI = gross margin dollars ÷ average inventory at cost

Use a full 12 months of gross margin, and average your inventory across the same period. A single year-end figure can mislead, because many businesses are low on stock at that point.

A worked example

A store has sales of $500,000, cost of goods sold of $300,000 and average inventory of $80,000 at cost. Gross margin is $200,000, so GMROI is $200,000 ÷ $80,000 = 2.5. Every dollar of stock earned $2.50 of gross margin in the year.

Why it beats margin alone

Category	Sales	Cost of goods	Gross margin	Margin %	Avg inventory	Turns	GMROI
Apparel	$300,000	$165,000	$135,000	45%	$75,000	2.2	1.80
Footwear	$200,000	$120,000	$80,000	40%	$50,000	2.4	1.60
Accessories	$100,000	$45,000	$55,000	55%	$15,000	3.0	3.67

Apparel brings in the most margin dollars, at a GMROI of 1.80. Accessories reach 3.67, about twice as much for each dollar of stock. If you had $10,000 more to invest, this table tells you where to look first.

What is a good GMROI?

There is no single benchmark, because it varies by category and by business. A common rule of thumb is that anything above 1 means your margin exceeds your stock investment, and that 2 to 3 is a good result. A GMROI of 1 will not usually cover rent and wages, so compare yourself with similar categories and your own trend over time.

How to use it

• High GMROI, frequent stock-outs: give it more stock and more open-to-buy.
• Low GMROI, high margin: the stock is sitting too long. Buy less, more often.
• Low GMROI, low margin: mark it down, renegotiate cost or drop it. See how to find dead stock.

GMROI also connects to inventory turnover. It equals your margin percentage multiplied by sales divided by average inventory, so you can raise it with better margin, faster turns or both. Use it to decide how to divide your open-to-buy.

Prefer not to build it yourself? Use the free GMROI calculator.

In a spreadsheet

GMROI: =(Sales-COGS)/AverageInventory

Where the Optimization Lab fits

Store health in the Statadventure Optimization Lab shows GMROI for each item over the last 12 months, and compares stores and categories side by side. See our page on retail inventory management software.

Frequently asked questions

What does GMROI stand for?

Gross margin return on inventory investment. It shows the gross margin earned per dollar of stock held at cost.

What is the difference between GMROI and inventory turnover?

Turnover shows how often stock sells through. GMROI combines that speed with margin, so it shows what the stock earns.

Can GMROI be below 1?

Yes. It means the stock earned less gross margin in a year than the stock itself cost.