Gross Margin Return on Inventory Investment (GROII)

Gross Margin Return on Inventory Investment (GROII) is a financial metric used in the shipping industry to measure the profitability of inventory investment. It measures the return on investment (ROI) of a company’s inventory by comparing the gross margin generated by the inventory to the total cost of the inventory. 

The GROII is calculated by dividing the gross margin generated by the inventory by the total cost of the inventory, and then multiplying the result by 100 to express it as a percentage. The formula for GROII is: 

GROII = (Gross Margin / Inventory Cost) x 100 

Where: 

Gross Margin = Total Sales – Cost of Goods Sold 

Inventory Cost = Cost of Inventory at the Beginning of the Period + Purchases During the Period – Cost of Inventory at the End of the Period 

For example, let’s say a shipping company has an inventory cost of $100,000 at the beginning of the year, makes purchases of $500,000 during the year, and has an inventory cost of $80,000 at the end of the year. The company generates total sales of $800,000 and incurs a cost of goods sold of $400,000 during the year. The gross margin for the year would be: 

Gross Margin = $800,000 – $400,000 = $400,000 

The inventory cost would be: 

Inventory Cost = $100,000 + $500,000 – $80,000 = $520,000 

The GROII would then be calculated as: 

GROII = ($400,000 / $520,000) x 100 = 76.92% 

A GROII of 100% or higher indicates that the company is generating enough gross margin from its inventory to cover the total cost of the inventory. A GROII below 100% indicates that the company is not generating enough gross margin to cover the cost of the inventory, which can lead to reduced profitability and potential financial challenges.