What this calculator does
GMROI answers a question a margin figure cannot: how hard is the money sitting in stock actually working. It divides gross profit by the average cost of inventory held, so a fast-moving product at a modest margin can beat a slow one at a high margin.
A result of 2.25 means every dollar invested in inventory returned $2.25 of gross profit over the period. Anything below 1.00 means the stock is not even covering its own cost in profit terms.
The formula
Gross profit is net sales less cost of goods sold. Average inventory cost is the mean of the opening and closing balances. Dividing the first by the second gives the return.
| Term | Meaning |
|---|---|
| GMROI | Gross profit divided by average inventory cost, expressed as a multiple. |
| Average inventory | The mean of opening and closing inventory at cost, not at retail. |
| Gross profit | Net sales less cost of goods sold. |
The inputs explained
| Field | What to enter |
|---|---|
| Net sales ($) | Net sales for the period. |
| Cost of goods sold ($) | Cost of goods sold for the same period. |
| Beginning inventory cost ($) | Inventory at cost at the start of the period. |
| Ending inventory cost ($) | Inventory at cost at the end of the period. |
When to use it
Comparing product categories
A high-margin line that sits for months can return less than a thin-margin line that turns weekly.
Deciding what to stock
Shelf space and working capital are both limited, and GMROI ranks candidates for both.
Assessing a buying decision
Ordering more of something improves availability but lowers the return on the capital committed.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much does margin drive the return?
The same sales and stock at three levels of cost of goods.
Questions
What is a good GMROI?
Above 3.00 is generally considered strong in retail, and around 2.00 is common. It varies enormously by sector: grocery runs high on fast turns and thin margins, while jewellery runs low on slow turns and fat ones.
Why use inventory at cost rather than retail?
Because the question is what the invested capital returned, and what you invested is the cost. Using retail value would compare profit against a figure that already includes that profit.
How does this differ from inventory turnover?
Turnover measures speed alone; GMROI combines speed with profitability. A product can turn quickly at a loss, which turnover would flatter and GMROI would not.
Does it account for holding costs?
No. Storage, insurance, shrinkage and obsolescence all sit outside this calculation, so the real return on slow-moving stock is worse than GMROI suggests.
For how fast stock moves, see the turnover ratios calculator. For optimal order sizes, see the EOQ calculator.