NMROII - Percentage
Net Margin Return On Inventory Invested (NMROII) Calculator Explained::
(a) What is this? NMROII, expressed as a %, combines Net Profit and stock turn to give you an efficiency ratio
(b) What does it tell me? Similar to GMROII %, NMROII % considers the Net Margin rather than the Gross Margin. This calculator combines stock turn and Net Profit to determine a ratio. It tells you how many NP$ you get for each $1 investment you make at the start of the year. In this calculation it is expressed as a percentage. The more money you make the better it is. You can use it to compare products in a category, and you can use it to compare categories. This ratio presents as a percentage. 100% is effectively where you started, because this is the sum you invested to start with. 100% means that you invested a dollar at the start of the year and it generated a a dollar of NP profit at the end of the year. 200% means you invested one dollar at the start of the year and it generated $2 of NP Profit. Net Margin Return On Inventory Invested became popular when it was discovered large Retailers used to it assess the performance of their categories. Smaller retailers tend to use it infrequently.
(c) Why should I use it? This calculator effectively combines the results of the different activities in your store, pricing, range, promotions etc and tells you how effective you have been doing these activities.
(d) Caution: You need to read this disclaimer attached to the calculator. NMROII is just one tool at your disposal. It does not tell you to exit or enter categories or products, but it is a useful point of comparison. It's other flaw is that it does not tell you how much money you are making. It is simply a ratio. Use it at your own risk.
GMROII - Disclaimer
Benefits and Drawbacks of GMROII
GMROII is an excellent analytical tool and provides the following benefits to Retailers:
Combines GP and stock turns. Provides an inherently sound and well-recognized measure for business performance. Can be used to compare return achieved from disparate lines, departments, categories, items, brands or models, for different stores or businesses.Provides a basis for better allocating stock investment. Identify weak and strong SKUís/categories. Assist in developing layout, presentation, promotion and pricing.Provides better basis for buying decisions.
There are however some drawbacks, or points to be considered in using the GMROII measure.
It is not a recognized accounting tool. Accountants will typically not be familiar with this measure. GMROII is however, used widely by Business Analysts for reviewing business performance and getting comparative measures across companies in an industry, and across industries.Although a single figure, it is the function of quite separate and important decision making activities (stock management, GP, and pricing management), each of which has to be individually addressed and balanced to give the optimum trade offs & balances. Using GMROII as the sole determiner of selecting range is a drawback as high performers tend to be rewarded whereas low performing products can be singled out for deletion. This is flawed logic as it is not a ranging tool. The GP may not include rebates, discounts, allowances, nor does the stock turn include costs such as the cost of carrying product.
Overall, GMROII is an extremely powerful and instructive business measurement tool. It should be used as a replacement for using other recognised business measures.