Definition
Gross profit on merchandise sales for the period divided by average inventory value, measuring the period gross profit corresponding to each unit of average inventory.
In detail
GMROI measures the gross margin return generated by inventory investment; it is not the sales gross margin rate, nor is it return on invested capital. It equals gross margin divided by average inventory value, or sales gross margin rate multiplied by sales-basis turnover. Do not multiply by turnover again, and do not directly apply cost-of-goods-sold basis turnover or forward-looking QIT. The period, currency, and inventory valuation basis must be stated; when average inventory is zero or missing, do not output the ratio.
Example in practice
A distributor has annual sales of 100 ten-thousand yuan, cost of sales of 75 ten-thousand yuan, and average inventory of 10 ten-thousand yuan. GMROI is 25 divided by 10, i.e. 2.5. Turnover on the sales basis is 10, and on the cost basis is 7.5. The team reduces inventory through reliable replenishment, then observes changes in gross margin return and stockouts, rather than comparing only purchase discounts.