How to Calculate Gross Margin Return on Investment

Gross margin return on investment (GMROI) is an effective tool used in retail business. It measures the amount invested in procuring an inventory against the amount made from selling the inventory and the marginal return earned on such an investment. It is calculated by using gross profit margin, sales and average cost of inventory. The result is expressed in a ratio or in dollar value.

Instructions

Difficulty: Moderate

1. Estimate your gross profit margin percentage to assess the gross margin return on investment. Find gross profit margin, which is a dollar amount, by subtracting the cost of goods sold from total sales on the item. Now, to find gross profit margin percentage, divide gross profit margin amount by total sales.
2. Find the average cost of stock or inventory. Use the opening inventory for the period, which includes cost of the goods sold, transportation, shipping and other expenses associated with procuring the goods. Add to this the closing inventory of that period and divide the value by 2 to find the average cost of inventory.
3. Divide total sales by average cost of inventory to estimate the total sales to inventory ratio.
4. Calculate the percentage value of gross margin return on investment by multiplying the gross profit margin percentage arrived at in Step 1 with the sales to inventory ratio from Step 3. A higher GMROI percentage indicates better inventory production.
5. Compute the dollar value of gross margin return on investment by dividing the gross profit margin dollar amount by the average cost of inventory. The result indicates how many dollars in gross margin profit were made for each dollar invested in the inventory.