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What is a book-to-bill ratio?
A book-to-bill ratio measures the number of orders coming in versus the number of orders going out for a company. A book-to-bill ratio above one means that more orders are coming in than are being filled. A ratio below one means that shipments or deliveries are outpacing orders. The company is not getting enough new orders.
The ratio is widely tracked in the technology industry, particularly the semiconductor industry. The North American Semiconductor-Equipment book-to-bill ratio is a closely followed leading indicator of demand trends for the global semiconductor industry.
Book-to-bill ratios are typically measured on a monthly or quarterly basis.
Formula for book-to-bill ratio
Book-to-bill ratio = (Orders received in a specific period) / (Orders shipped in the same period)
Why does the book-to-bill ratio matter?
The bill-to-book ratio gives an early indication of demand trends for a product. The ratio is especially important in industries where demand is volatile and management needs to understand when to start scaling back or scaling up its capacity.
A company fulfilling orders as they come in has a book-to-bill ratio of one. A ratio greater than one indicates the company is getting more orders than it can supply. Management could either speed up its production and shipping processes or consider investing in capacity expansion to meet demand.
A ratio less than one indicates that supply is more than demand and management may have to consider scaling back its production or take action to increase sales.
The ratio is also used by investors, since a high ratio indicates that a company has robust demand and may provide a good investment opportunity.
Examples of book-to-bill ratio
Suppose Company ABC receives 200 orders (booked) for automobile parts in a given month. Company ABC ships all 200 orders and bills its customers at the end of the month. Expressed as a fraction, its book-to-bill ratio is 200 (booked)/200 (billed) or 1.
In another example, XYZ receives semiconductor orders worth US$1,200 in a given month while it ships and bills US$1,000 in that month. Its book-to-bill ratio is 1.20. Demand for XYZ’s semiconductors thus exceeded supply by 20%.
Frequently Asked Questions
The ideal book-to-bill ratio is one. This means that the company is able to keep up with its orders. A book-to-bill ratio of more than one is also generally seen as positive as it suggests good prospects for the company, provided the company can increase its production to meet demand.
As an investor, you should look out for stocks of companies or industries with a higher book-to-bill ratio.
The book-to-bill ratio is especially important in industries where demand is volatile and companies take time to fulfil orders for their products or services. These include technology firms, manufacturing firms, website developers, marketing agencies and other service providers. Businesses that make use of book-to-bill ratios are often B2B companies, although this is not exclusively the case.
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