Wﷺhat Is the Gross Margin Return on Investment (GMROI)?

The 澳洲幸运5官方开奖结果体彩网:gross margin return on investment (GMROI) is an 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:average inventory cost and is used often in the retail industry. G❀MROI is also known as the gross margin return on inventory investme🐭nt (GMROII).

Understanding the Gross Margin Return on Inve๊sꦆtment (GMROI)

The GMROI is a useful measure as it helps the investor or manager see the average amount that the inventory returns above its cost. A ratio higher than one means the firm is selling the merchandise for more than what it costs the firm to acquire it and shows that the business has a good balance between its sales, margin, and cost🀅 of inventory.

The opposite is true for a ratio below 1. Some sources recommend the rule of thumb for GMROI in a retaღil store to be 3.2 or higher so that all occupancy and employee costs and profits are covered.🌊

How🐽 to Calculate the Grosꦛs Margin Return on Investment (GMROI)

The formula for the GMROI is as follows:

 $\mathit{GMROI} = \frac{\text{Gross profit}}{\text{Average inventory cost}}$GMROI=Average inventory costGross profit​

To calculate the gross margin return on inventory, two metrics must be known: the gross margin and the 澳洲幸运5官方开奖结果体彩网:average inventory. The gross profit is calculated by subtracting a company's 澳洲幸运5官方开奖结果体彩网: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 while consid🐠ering the obsolete inventory portion scenarios as well.

How to Use the Gross Ma♌rgin R🅷eturn on Investment (GMROI)

For example, assume luxury retail company ABC has a 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%, wꦛhich means it 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. Company ABC is thus selling the merchandise for more than a $3.25 markup for each dollar spent on inventory.

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 $2♎0 million. Company XYZ has a GMROI of 0.75, or $15 million/ $20 million. It thus 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 making only $0.75 cents for each $1 spent on inventory, which is not enough to cover business expenses other than inventory such as selling, general, and administr🐈ative expense (SG&A), marketing, and sales. For that XYZ margins are sub-⭕standard. In comparison to company XYZ, Company ABC may be a more ideal investment based on the GMROI.