Book-to-Bill

Book-to-Bill Ratio: Definition, Calculation, and Use

What it is

The book-to-bill ratio compares orders received (bookings) to units shipped and billed over a specified period (typically a month or quarter). It’s a widely used indicator of demand versus supply in industries with volatile order cycles—most notably semiconductor equipment, technology, aerospace, and defense.

Formula

Book-to-bill = Orders received / Orders shipped (billed)

Example:
* If orders received = 500 and orders shipped = 500, book-to-bill = 500 / 500 = 1.0

How to interpret it

• Greater than 1 (>1): New orders exceed shipments — demand is rising or outpacing current supply. Can signal growth and future revenue if bookings convert to sales.
• Equal to 1 (=1): Orders received match shipments — supply and demand are roughly balanced.
• Less than 1 (<1): Shipments exceed new orders — the company may be drawing down backlog, indicating weakening current demand.

Simple examples

• Company A: 500 booked, 500 shipped → ratio = 1.00 (balanced)
• Company B: 500 booked, 610 shipped → ratio = 0.82 (500/610) — shipping backlog; demand may be softening
• Company C: 500 booked, 375 shipped → ratio = 1.33 (500/375) — strong incoming demand relative to current fulfillment

Bookings vs. Billings

• Bookings: Customer commitments or orders received (future revenue potential).
• Billings: Invoiced shipments where revenue recognition or cash collection occurs.
  The ratio compares customer intent (bookings) to completed sales (billings).

Why it matters to managers and investors

• Forward-looking signal: Rising book-to-bill suggests future revenue growth as orders are fulfilled.
• Operational insight: Helps assess capacity constraints, inventory needs, and production planning.
• Investment signal: Persistent trends (above or below 1) can inform buy/sell decisions, but should be combined with other financial and industry indicators.

Limitations and caveats

• Volatility: Short-term spikes or dips can result from large one-time orders, cancellations, or seasonal patterns.
• Backlog management: A ratio <1 may reflect healthy backlog depletion rather than poor demand if backlog was unusually large.
• Industry differences: “Good” levels vary by sector—expect different norms for semiconductors, aerospace, or industrial equipment.
• Accounting/timing effects: Revenue recognition rules, partial shipments, and billing timing can distort the ratio in the short run.

Practical use

• Monitor month-to-month or quarter-to-quarter trends rather than single-period values.
• Combine with backlog, revenue, margin, and capacity metrics for a fuller view of performance.
• Watch for persistent divergence (sustained >1 or <1) as a signal to investigate demand outlook or operational constraints.

Takeaway

The book-to-bill ratio is a concise measure of whether new orders are keeping pace with shipments. It’s a useful early indicator of demand strength, but its signal is best interpreted in context—considering industry norms, backlog levels, seasonality, and other financial metrics.