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Is our inventory earning enough gross margin for the cash it ties up?

GMROI tells you how many gross-margin dollars you earn for every dollar tied up in inventory. Use a full 12 months of gross margin and the average of your month-end inventory balances, both at cost, so the ratio is not distorted by a seasonal peak.

Your assumptions

Worked-example values — replace with yours

Gross margin· last 12 months

Revenue minus cost of goods sold.Average inventory at cost· average of 13 month-end balances

GMROI · Estimated

2.67×

gross-margin $ per $1 of inventory, per year

Cash that stock ties up: $3.0Msee the inventory cash release tool

Acceptable. Above a 2.0× rule-of-thumb floor, but there is room. Classifying items and right-sizing safety stock typically lift this.

This is an estimate. Check it on your own data.

GMROI is the headline; the levers behind it are classification, demand planning and safety-stock policy by item. Seeing it by family on your own stock shows which lever moves your number.

Check it on my data →

Your inputs travel with you into the request, or into the free Margin Scan. Nothing is sent to ADEXMA until you submit a form.

The formula

GMROI = gross margin ($, last 12 months) ÷ average inventory at cost ($)

Worked example · the values pre-filled above

Gross margin: $8,000,000 · Average inventory at cost: $3,000,000

$8,000,000 ÷ $3,000,000 = 2.67×.
Every $1 of stock earned $2.67 of gross margin over the year.

Result: 2.67×

What this assumes

Gross margin and inventory are on the same basis (same company, same 12 months).
The 2.0× floor and 3.0× mark are rules of thumb, not industry benchmarks; sectors differ widely.
It is an estimate from your own inputs. Results from different tools overlap and must never be added together into one savings figure.

Sources

Levy, M. & Weitz, B., Retailing Management (McGraw-Hill) — Definition and use of GMROI.
Silver, E., Pyke, D. & Thomas, D., Inventory and Production Management in Supply Chains (CRC Press, 4th ed.) — Inventory investment and return trade-offs.
ADEXMA Calculation Catalog · FRM-SC-026 · part of Margin Architecture™.

Questions people ask

What is a good GMROI?

It depends on the sector. Many practitioners use 2.0× as a rough floor and 3.0× as strong, but compare against your own industry and your own trend.

Which inventory number should I use?

The average of month-end balances over the same 12 months as the gross margin, valued at cost.

CashInventory cash releaseHow much cash would we free up by holding fewer days of inventory?CashEconomic order quantityHow much should we order at a time?

On your own data, Chloé picks up this finding in a workspace and your advisor confirms it. See what each plan adds →