GMROI Calculator: Gross Margin Return on Investment

What does a GMROI of 2.00 mean?

On the defaults — $100,000 of revenue, $60,000 of cost of goods sold and $20,000 of average inventory cost — the gross margin is $40,000.00 and the GMROI is 2.00, which means every $1 sitting in stock comes back as $2.00 of gross margin. The gross margin is the revenue minus the cost of goods sold: $100,000 − $60,000 = $40,000.00. The GMROI is the gross margin divided by the average inventory cost: $40,000.00 ÷ $20,000.00 = 2.00. A GMROI of 2.50 means each inventory dollar earns two dollars and fifty cents of gross margin, and a GMROI of 1.00 means each inventory dollar earns exactly one dollar back — the stock pays for itself and nothing more.

Three things about the model are worth stating plainly.

First, the division is $40,000.00 ÷ $20,000.00 = 2.00. Second, the meaning is two dollars of gross margin per dollar of inventory — the return on the stock, not the return on the whole business. And third, the GMROI is displayed to two decimals, half-up, and a GMROI that displays as 1.60 can sit a hair below the displayed figure: $50,000.50 of revenue, $30,000.25 of cost of goods sold and $12,500.75 of inventory gives 1.599924, which displays as 1.60 — all listed in Accuracy & limitations.

The worked example, line by line

Setup: revenue $100,000, cost of goods sold $60,000, average inventory cost $20,000.

Line 1 — the gross margin. $100,000 − $60,000 = $40,000.00.

Line 2 — the GMROI. $40,000.00 ÷ $20,000.00 = 2.00.

Line 3 — the check. At a $50,000 gross margin the GMROI is 2.50; and at $49,999 it is 2.499950 — below 2.50.

Every branch, checked

Revenue $120,000: revenue $120,000.00; COGS $60,000.00; average inventory cost $20,000.00; gross margin $60,000.00; GMROI 3.00 — With $120,000 of revenue the gross margin rises to $60,000.00 and the GMROI rises to 3.00.

Revenue $80,000: revenue $80,000.00; COGS $60,000.00; average inventory cost $20,000.00; gross margin $20,000.00; GMROI 1.00 — With $80,000 of revenue the gross margin falls to $20,000.00 and the GMROI falls to 1.00.

COGS $50,000: revenue $100,000.00; COGS $50,000.00; average inventory cost $20,000.00; gross margin $50,000.00; GMROI 2.50 — With $50,000 of cost of goods sold the gross margin rises to $50,000.00 and the GMROI rises to 2.50.

COGS $70,000: revenue $100,000.00; COGS $70,000.00; average inventory cost $20,000.00; gross margin $30,000.00; GMROI 1.50 — With $70,000 of cost of goods sold the gross margin falls to $30,000.00 and the GMROI falls to 1.50.

Average inventory cost $25,000: revenue $100,000.00; COGS $60,000.00; average inventory cost $25,000.00; gross margin $40,000.00; GMROI 1.60 — With $25,000 of inventory the same $40,000.00 margin gives a GMROI of only 1.60.

Average inventory cost $16,000: revenue $100,000.00; COGS $60,000.00; average inventory cost $16,000.00; gross margin $40,000.00; GMROI 2.50 — With $16,000 of inventory the same $40,000.00 margin gives a GMROI of 2.50.

The reverses, worked backwards

Smallest gross margin for the GMROI to REACH 2.50: At the displayed $50,000 the figures are revenue $110,000.00; COGS $60,000.00; average inventory cost $20,000.00; gross margin $50,000.00; GMROI 2.50. At $50,000 the GMROI is exactly 2.50 — on the line. At $49,999 the GMROI is 2.499950 unrounded — below the target, though it displays as 2.50 — so $50,000 is the smallest gross margin for the GMROI to reach 2.50.

Largest average inventory cost for the GMROI to STAY at or above 2.00: At the displayed $20,000 the figures are revenue $100,000.00; COGS $60,000.00; average inventory cost $20,000.00; gross margin $40,000.00; GMROI 2.00. At $20,000 the GMROI is exactly 2.00 — on the line. At $20,001 the GMROI is 1.999900 unrounded — below the target, though it displays as 2.00 — so $20,000 is the largest average inventory cost for the GMROI to stay at or above 2.00.

Largest COGS for the GMROI to STAY at or above 2.50: At the displayed $50,000 the figures are revenue $100,000.00; COGS $50,000.00; average inventory cost $20,000.00; gross margin $50,000.00; GMROI 2.50. At $50,000 the GMROI is exactly 2.50 — on the line. At $50,001 the GMROI is 2.499950 unrounded — below the target, though it displays as 2.50 — so $50,000 is the largest COGS for the GMROI to stay at or above 2.50.

Largest average inventory cost for the GMROI to REACH 3.00: At the displayed $13,333 the figures are revenue $100,000.00; COGS $60,000.00; average inventory cost $13,333.00; gross margin $40,000.00; GMROI 3.00 (unrounded 3.000075). At $13,333 the GMROI is 3.000075 unrounded — above the target. At $13,334 the GMROI is 2.999850 unrounded — below the target, though it displays as 3.00 — so $13,333 is the largest average inventory cost for the GMROI to reach 3.00.

Smallest revenue for the GMROI to REACH 3.00: At the displayed $120,000 the figures are revenue $120,000.00; COGS $60,000.00; average inventory cost $20,000.00; gross margin $60,000.00; GMROI 3.00. At $120,000 the GMROI is exactly 3.00 — on the line. At $119,999 the GMROI is 2.999950 unrounded — below the target, though it displays as 3.00 — so $120,000 is the smallest revenue for the GMROI to reach 3.00.

Largest COGS for the GMROI to STAY at or above 1.50: At the displayed $70,000 the figures are revenue $100,000.00; COGS $70,000.00; average inventory cost $20,000.00; gross margin $30,000.00; GMROI 1.50. At $70,000 the GMROI is exactly 1.50 — on the line. At $70,001 the GMROI is 1.499950 unrounded — below the target, though it displays as 1.50 — so $70,000 is the largest COGS for the GMROI to stay at or above 1.50.

A warning about the neighbours: every neighbour above sits one dollar from the star, and every neighbour GMROI is a hair below the target even though it displays as the target — a one-dollar move in any input moves the GMROI by less than 0.005, so the displayed two-decimal figure cannot tell the star from its neighbour. The page prints the unrounded six-decimal value in full so the rounding does not mislead you: 2.499950, 1.999900, 3.000075, 2.999850, 1.499950.

What the defaults assume

The defaults are $100,000 of revenue, $60,000 of cost of goods sold and $20,000 of average inventory cost — revenue $100,000.00; COGS $60,000.00; average inventory cost $20,000.00; gross margin $40,000.00; GMROI 2.00. With Revenue $120,000, revenue $120,000.00; COGS $60,000.00; average inventory cost $20,000.00; gross margin $60,000.00; GMROI 3.00. With Revenue $80,000, revenue $80,000.00; COGS $60,000.00; average inventory cost $20,000.00; gross margin $20,000.00; GMROI 1.00. With COGS $50,000, revenue $100,000.00; COGS $50,000.00; average inventory cost $20,000.00; gross margin $50,000.00; GMROI 2.50. With COGS $70,000, revenue $100,000.00; COGS $70,000.00; average inventory cost $20,000.00; gross margin $30,000.00; GMROI 1.50. With Average inventory cost $25,000, revenue $100,000.00; COGS $60,000.00; average inventory cost $25,000.00; gross margin $40,000.00; GMROI 1.60. With Average inventory cost $16,000, revenue $100,000.00; COGS $60,000.00; average inventory cost $16,000.00; gross margin $40,000.00; GMROI 2.50. With All zero, revenue $0.00; COGS $0.00; average inventory cost $0.00; gross margin $0.00; GMROI undefined — no revenue, no costs, no inventory, and the GMROI is undefined. With Revenue $75,000, COGS $45,000, inventory $15,000, revenue $75,000.00; COGS $45,000.00; average inventory cost $15,000.00; gross margin $30,000.00; GMROI 2.00. With Fractional inputs, revenue $50,000.50; COGS $30,000.25; average inventory cost $12,500.75; gross margin $20,000.25; GMROI 1.60 (unrounded 1.599924) (unrounded 1.599924) — the GMROI displays as 1.60. With Revenue $500,000, COGS $275,000, inventory $90,000, revenue $500,000.00; COGS $275,000.00; average inventory cost $90,000.00; gross margin $225,000.00; GMROI 2.50. With Average inventory cost $0, revenue $100,000.00; COGS $60,000.00; average inventory cost $0.00; gross margin $40,000.00; GMROI undefined — division by zero, no inventory cost to divide by. With Revenue = COGS, revenue $60,000.00; COGS $60,000.00; average inventory cost $20,000.00; gross margin $0.00; GMROI 0.00 — a $0 margin is a real figure, not undefined. With COGS above revenue, revenue $50,000.00; COGS $60,000.00; average inventory cost $20,000.00; gross margin −$10,000.00; GMROI −0.50 — selling below cost, a negative GMROI. With Average inventory cost $5,000, revenue $100,000.00; COGS $60,000.00; average inventory cost $5,000.00; gross margin $40,000.00; GMROI 8.00. With Fractional inputs, revenue $99,999.99; COGS $66,666.66; average inventory cost $16,666.67; gross margin $33,333.33; GMROI 2.00 (unrounded 1.999999) (unrounded 1.999999) — the GMROI displays as 2.00. With GMROI below 1, revenue $90,000.00; COGS $75,000.00; average inventory cost $20,000.00; gross margin $15,000.00; GMROI 0.75. With Revenue $125,000, COGS $80,000, inventory $15,000, revenue $125,000.00; COGS $80,000.00; average inventory cost $15,000.00; gross margin $45,000.00; GMROI 3.00.

A note on the rounding: the GMROI is displayed to two decimals, half-up. With the fractional inputs the unrounded GMROI is 1.599924 — it displays as 1.60 — and with the second fractional case the unrounded GMROI is 1.999999 — it displays as 2.00. The page prints the unrounded value so the rounding does not mislead you.

Output · formula · meaning

Who uses this

• The shop owner checking which stock earns its shelf: they learn $40,000.00 of gross margin on $20,000.00 of inventory is a GMROI of 2.00 — and they check the $50,000 reverse to see the margin that pushes the GMROI to 2.50.
• The retail buyer deciding what to reorder: they learn a GMROI of 1.60 on $25,000 of inventory is worse than 2.50 on $16,000 of inventory — and they check the $13,333 reverse to see the inventory cost that reaches a GMROI of 3.00.
• The e-commerce seller pricing clearance stock: they learn a GMROI of 0.75 means the stock barely pays for itself — and they check the $70,000 reverse to see the largest cost of goods sold that keeps the GMROI at or above 1.50.
• The student learning retail math: they learn the GMROI is the gross margin divided by the average inventory cost — and they check the $120,000 reverse to see the revenue that reaches a GMROI of 3.00.

Accuracy & limitations

The math is first-principles: the gross margin is the revenue minus the cost of goods sold, and the GMROI is the gross margin divided by the average inventory cost — the GMROI displayed to two decimals half-up. There IS division in this calculator — the GMROI is UNDEFINED when the average inventory cost is $0 (division by zero) or negative (a negative inventory cost makes no sense) — the calculator shows “GMROI undefined” with a note, never hides it. At a $0 gross margin the GMROI is 0.00 — a real figure, not undefined. At cost of goods sold above revenue the gross margin is negative and the GMROI is negative — selling below cost, shown with the minus sign. With the fractional inputs the unrounded GMROI is 1.599924 — it displays as 1.60 — and with the second fractional case it is 1.999999 — it displays as 2.00. What the model cannot do is price the profit: the GMROI is a gross-margin return, not a net return — it says nothing about rent, wages, or what it costs to hold the stock, and it assumes the revenue, the cost of goods sold and the inventory cost stay flat over the period. A GMROI of 2.00 on fast-moving stock is worth more than the same GMROI on stock that sits for a year. Use it to see what each inventory dollar earns — then check the margins, the turnover and the holding costs before you decide what to stock.

Frequently asked questions