GMROII is traditionally calculated by using one year's gross profit against the average of 12 or 13 units of inventory at cost.
GMROII may vary depending on which segment is being analyzed (e.g. women's apparel, toys, home, sportswear, etc.
[2] GMROII is particularly important in the wholesale and retail industries,[1] but it is used relatively less frequently in manufacturing.
[4]: 3 As stock turn (i.e. sales units divided by average inventory units) and Gross Margin Percent can vary heavily by item, market segment, location, and period, GMROII can act as the main driver for retailers to analyze their product and store offering.
For a retailer whose budgets and bonuses are based on sales, employees often achieve that by lowering the margin or putting too much stock in their stores.
A high GMROII indicates a good balance of sales, margin, and inventory cost.
It has been suggested that GMROII is used less often in a manufacturing context because it is difficult to associate raw material inventory with specific products sold.
[3] Financial textbooks often show a formula with a yearly or monthly calculation.
When tactical decisions are required for variable time periods, it is helpful for systems to be set up so that GMROII can be analyzed at either the yearly, monthly, or weekly level.
Due to the textbook GMROII formula, depending on the time period, a different result would occur.
For example: Therefore, it is advantageous to use Average Weekly GMROII which takes time out of the picture.
The formula is: Average Weekly GMROII = (Profits for the total time period) / (Sum of week ending inventory cost value) Other formulas that are often given for GMROII are the following (note that all of these are mathematically equivalent because all can be reduced down to Margin/Avg_Inventory_cost):
Note that GMROS can be calculated by multiplying American Levi's GMROII by Density (Units per square foot).
GMROI has been described as one of the few business measures for which "it is virtually impossible to set a precise goal", and the costs of holding inventory are not taken into account.