GMROI compares gross profit generated during a period with the average cost value of inventory held during that period.
How it works in retail
The common formula is gross profit in currency divided by average inventory at cost. It combines the effects of merchandise margin and the amount invested in stock.
A retail example
Gross profit of $90,000 on average inventory at cost of $45,000 gives a GMROI of 2.0 for the measured period.
What to keep in mind
GMROI is not net profit and does not deduct all operating expenses. Compare consistent periods, inventory valuation methods and categories.
Sources & further reading
NRF: Retail inventory management guide
Examples are illustrative. Terminology and measurement conventions can vary by business and market.