GMROI Formula to Calculate Gross Profit Margin Return on Investment

Calculate GMROI (Gross Margin Return on Investment) in Microsoft Excel or Google Sheets by following the directions below. GMROI is an important tool we’ve used for two decades of strategic consulting for clients.

GMROI definition: GMROI (Gross Margin Return on Investment) evaluates profitability of inventory with a ratio. It analyzes your company’s ability to turn inventory into cash, above the cost of the inventory.

The GMROI formula and its cousin, the Turn Earn Index, are two simple ways to manage your inventory and run your business.

And you don’t need to call your accountant or buy special software to use these tools, you can use them in Excel or Google Sheets.

Need to know how to calculate the GMROI formula? Manage inventory? Calculate inventory turns? Keep reading!

GMROI formula to manage inventory

Gross Margin Return on Investment, or GMROI, is a simple yet powerful tool to manage inventory. And we’ve learned over the years that analysis tools are often powerful because they’re simple.

To calculate GMROI just divide your gross margin by average inventory cost. If you like to think in terms of an Excel or Google Sheets formula, then it’s (gross margin $$)/(average inventory cost $$). GMROI is useful for retailers because as much 70% or more of a retailer’s assets can be tied up in inventory. GMROI helps calculate if all that inventory is generating profit for your business. It shows you the gross profit earned for each dollar of your inventory investment.

You can analyze GMROI in Google Sheets just as easily as Excel.

For example, imagine your annual gross margin dollars, or your annual gross profit, is $250,000 and your average inventory value is $200,000. In this case your GMROI is 1.25. Sometimes GMROI is multiplied by 100, so in this case it is 125. Retailers or distributors typically evaluate inventory with GMROI. Manufacturers use it, too, but not as often.

Manufacturers tend to have a more difficult time connecting raw materials with finished goods. Raw material inventory can be used on many different products. On the other hand, it’s very straight-forward for a retailer, reseller or distributor to use GMROI because it’s simpler to connect purchase expense with inventory turns and gross margin.

This article shows you the GMROI formula and the Turn and Earn ratio formula in Microsoft Excel or Google Sheets.

A number or ratio higher than 1 indicates a company is selling its inventory at a higher value than it paid for the inventory, so consider a ratio of 1 to be your absolute minimum. A general rule of thumb for retail stores is to have a GMROI of 3.2 or greater.

Pronunciation?

Sometimes GMROI is called “gimroy” (pronounced either with a soft “J” /ˈjimˌroi/ or with a hard “G” /ˈgimˌroi/).

GMROI’s impact on products with lower gross margin

GMROI is not without its detractors.

Opponents of using GMROI point to it being biased because it overstates the performance for products that have a lower gross margin. They also point out it understates products with a high gross margin.

Opponents also point to the two components, gross margin and inventory turns, having equal impact on the formula. They argue that gross margin is a more important variable.

We won’t get sidetracked into arguing for or against GMROI in this article, we’re simply showing the calculation and the formula.

GMROI Gross Margin Return on Investment calculation example

The GMROI formula tells you how many dollars of gross profit are earned from each dollar you have in inventory. In the above example, we’re producing $1.25 in gross profit for every $1 invested in inventory.

GMROI measures inventory differently than the Turn/Earn Index (see below). Neither of these tools is “better” than the other. It’s like a hammer is not “better” than a screwdriver, they’re just different tools in your business toolbox.

Using the Turn and Earn Index vs. GMROI to manage inventory

If you’re a purchasing manager or accountant you may want to justify selling of stocking a SKU (stock keeping unit) with the Turn/Earn Index.

Some people call it the Turn/Earn ratio, Turn/Earn formula, or simple Turn and Earn. It’s a simple way to manage inventory. And you can evaluate your entire inventory, or just a single part number to see if it is worth stocking or selling.

Turn and Earn Index definition: The Turn and Earn Index analyzes inventory turnover and gross margin with a ratio. To calculate your turn and earn, multiply inventory turns by gross margin percentage.

Calculate the Turn/Earn index for your inventory. You do this by multiplying your gross margin x turnover.

“Turnover” is simply your inventory turns. Here we show the definition for inventory turns.

Inventory Turns definition: Inventory turns is a measurement of how many times inventory is sold or consumed in a given time period, usually one year. Calculate inventory turns by taking cost of goods sold (COGS) and dividing by inventory cost.

Here’s an example of calculating your Turn/Earn Index. Let’s say you have a 35% margin and your inventory turns 5 times in a year. In this example, your Turn/Earn index is 175 (35 x 5 = 175).

Calculate the Turn/Earn Index

To calculate the Turn/Earn Index for an individual part number or SKU, simply multiply gross margin x turnover (units sold per year). Let’s dig a little deeper on how to use the Turn/Earn Index to make some business decisions, below.

Companies typically look for a minimum Index of 100 to 150. There are a lot of reasons for higher or lower numbers and a lot of it depends on whether you are a manufacturer, distributor or a retailer.

Here’s an example: A manufacturing company wants a lower minimum index of 100 for an individual part number. Possible reasons are that part number supports a broader product line. Or it supports replacement parts or components, or it addresses demand from specific market segments that are new for the manufacturer.

A retail store might have a higher Index goal of 150 for a SKU. There are reasons to have a higher Turn/Earn Index number. These include limited shelf space, catering to a specialized retail market or keeping inventory low to conserve cash.

How to calculate inventory turns in Excel or Google Sheets

The traditional way to measure SKUs over time is by “turns,” or how many times the inventory turns over each year.

One long formula for inventory turns (written here in a ‘spreadsheet-friendly’ format) is here (you may have to scroll right on a phone).

(($ beginning inventory + purchases over a defined period - ending inventory)/(ending inventory)) x (number of time periods).

Twelve months is the typical number of time periods.

A shorter formula to measure inventory turns (again, in a ‘spreadsheet-friendly’ format) is here (you may have to scroll right on a phone).

(Cost of goods from inventory over 12 months)/(Average inventory investment over 12 months).

Learn more about the GMROI formula:

Benchmarking measures key performance indicators, including the GMROI formula, comparing your business against peer companies. Hedges & Company managed the SEMA Financial Benchmarking program for seven years. It was a free member benefit for SEMA members.

Another related article: read about how price increases/decreases and unit sales affect gross profit.

More on strategy: Learn to create an aftermarket brand strategy.

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