What it is (short definition)
– The book-to-bill ratio compares new customer orders received (bookings) with the value or units shipped and invoiced (billings) over the same period (typically a month or a quarter). It’s most often used in cyclical, capital‑goods industries such as semiconductor equipment to signal whether demand is rising or falling.
Core formula
– Book‑to‑Bill = Orders Received ÷ Orders Shipped (also expressed as Bookings ÷ Billings)
Step‑by‑step: how to calculate
1. Choose the period (month, quarter).
2. Add up orders received during that period (bookings). These are customer commitments to buy.
3. Sum the units or dollar value shipped and invoiced during the same period (billings).
4. Divide bookings by billings.
5. Express the result as a decimal or ratio (e.g., 1.2 or 1.2:1).
Interpreting the result
– > 1.0: New orders exceed shipments. Commonly read as rising demand or backlog accumulation; may indicate future revenue growth if orders convert to fulfilled sales.
– = 1.0: Orders and shipments are balanced for the period — supply is keeping pace with demand.
– < 1.0: Shipments exceed new orders. This can mean the company is drawing down backlog (fulfilling prior orders) and that current demand is weakening.
Definitions of key terms (first use)
– Bookings (orders received): Customer commitments to purchase goods or services.
– Billings (orders shipped): Goods or services that have been shipped and invoiced; represents what the company is recognizing as billed revenue or receivable.
Why the ratio matters
– Leading signal: A sustained ratio above 1 suggests strengthening demand and potentially rising future revenue; below 1 suggests demand is cooling.
– Capacity and supply planning: Companies use it to decide whether to add production capacity or slow hiring/capital expenditures.
– Industry health: Aggregated book‑to‑bill series (for example, across semiconductor equipment makers) gives a quick read on sector momentum.
Common caveats and context
– Not a profitability measure: A high ratio shows order flow but not margins or cash collection.
– Timing and seasonality: One period’s shipments may include backlog from earlier months; seasonality can skew short‑term readings.
– Order quality matters: Large, later‑cancelled, or conditional orders inflate bookings without guaranteed revenue.
– Industry differences: What’s “good” varies by industry and supply‑chain norms.
Worked numeric examples
1) Example — strong demand
– Bookings = 500 units; Billings = 375 units.
– Book‑to‑Bill = 500 ÷ 375 = 1.333 (or 1.33:1). Interpretation: New orders exceed shipments; backlog has increased.
2) Example — demand falling / fulfilling backlog
– Bookings = 500 units; Billings = 610 units.
– Book‑to‑Bill = 500 ÷ 610 = 0.820 (or 0.82:1). Interpretation: Shipments outpaced new orders; company likely shipped orders that were booked in earlier periods.
Short checklist for using book‑to‑bill ratios
– Confirm the time window (month or quarter).
– Use consistent units (units vs. dollars) across bookings and billings.
– Check whether bookings are firm orders or conditional/soft orders.
– Compare against recent history (several periods) to spot trends.
– Adjust for seasonality and product lifecycle effects.
– Cross‑check with other metrics (backlog, inventory, revenue, margin) before drawing conclusions.
Practical example from the field
– A semiconductor equipment supplier reported a book‑to‑bill ratio moving back above 1 after several quarters as bookings rose 17% quarter‑over‑quarter. That kind of shift is often cited by managers and investors as an early sign of improving market demand, though it requires follow‑through in shipments and revenue to confirm.
What is a “good” book‑to‑bill?
– No universal threshold. Many practitioners regard sustained values above 1 as favorable because they imply growing demand, but whether that is “good” depends on company capacity, order quality, and broader market context. A single monthly spike is less meaningful than a multi‑period trend.
Why a ratio can fall below 1
– The company is completing orders booked earlier and not receiving enough new orders in the current period.
– Demand softens due to macro factors, price competition, or product
product life‑cycle effects (older products generate fewer new orders), or the company intentionally draws down backlog to manage inventory and working capital.
Implications of a book‑to‑bill below 1
– Near‑term revenue pressure. If new orders (bookings) remain below shipments/invoicing (billings), backlog shrinks and future reported revenue may decline once current backlog is shipped.
– Inventory and capacity signaling. A falling ratio can indicate excess production capacity or the need to cut production; alternatively, it may reflect deliberate inventory reductions.
– Pricing and competitive stress. Sustained weakness can be a sign of price competition or weaker end‑market demand that could force margin compression.
– Beware false alarms. Short‑term dips can be noise—seasonality, large one‑off shipments, or timing differences in recording orders can cause temporary moves.
Limitations and common pitfalls
– Timing differences. Bookings are recorded when an order is accepted; billings when invoiced. Differences in contract terms, partial shipments, or milestone invoicing distort the monthly ratio.
– Order quality. A high ratio driven by low‑quality orders (subject to cancellation or large discounts) is not equivalent to a high‑quality backlog.
– Backlog composition matters. Firm, non‑cancelable contracts are more valuable than tentative or contingent orders.
– Industry differences. Capital‑goods and semiconductor equipment industries typically use B/B more than consumer goods; comparability across industries is limited.
– Manipulation risk. Revenue and order recognition policies can be aggressive; check management discussion and audit notes.
How to calculate (simple formula and working examples)
– Formula: Book‑to‑bill ratio = Total Bookings in period ÷ Total Billings in period
(Bookings = value of new orders accepted; Billings = value invoiced or shipped in the same period.)
Worked example 1 — expansion signal
– Bookings = $120 million; Billings = $100 million.
– Book‑to‑bill = 120 ÷ 100 = 1.20.
– Interpretation: Orders exceed shipments by $20 million; backlog increases by $20 million (assuming no cancellations).
Worked example 2 — drawdown signal
– Bookings = $80 million; Billings = $100 million.
– Book‑to‑bill = 80 ÷ 100 = 0.80.
– Interpretation: Shipments exceed new orders; backlog declines by $20 million (again, ignoring cancellations).
Backlog dynamics (more complete bookkeeping)
– Change in backlog = Bookings − Billings − Cancellations + Contract modifications.
– If you report or model backlog, explicitly account for cancellations and renegotiations; otherwise the implied backlog change from bookings minus billings will be overstated.
Practical analysis checklist (step‑by‑step for analysts or students)
1. Confirm definitions: Are bookings and billings recognized on a comparable basis? (e.g., gross vs. net orders, inclusion of service revenue).
2. Smooth short‑term noise: compute a 3‑ or 6‑month moving average to reveal trend.
3. Check backlog quality: what portion is firm, non‑cancelable, and priced?
4. Adjust for seasonality: compare like periods (same quarter/year).
5. Read management commentary and footnotes for one‑offs (large orders, government contracts, cancellations).
6. Reconcile to balance‑sheet items: does implied backlog movement match inventory, deferred revenue, or cash‑flow trends?
7. Compare peers in the same industry for context.
When to be cautious
– A single monthly spike or dip is rarely decisive; require multi‑period confirmation.
– Rapidly rising book‑to‑bill without corresponding production capacity increases can lead to long lead times and customer disappointment.
– Falling book‑to‑bill in a capital‑equipment cycle can presage greater downturns, but timing varies by industry.
Use cases by industry
– Semiconductors and equipment: Widely used as a leading indicator of industry demand and capital spending; trade associations (e.g., SEMI) publish sector-level B/B data.
– Capital goods/manufacturing: Helpful to gauge order intake and future revenue but highly influenced by large project timing.
– Services/software: Less commonly used because subscription contracts and recurring billing make bookings and billings definitions more varied.
Quick model template (one‑line)
– Projected backlog_next = backlog_current + bookings_forecast − billings_forecast − expected_cancellations
Sources for further reading
– Investopedia — Book‑to‑Bill Ratio: https://www.investopedia.com/terms/b/booktobill.asp
– SEMI (global electronics industry association) — Book‑to‑Bill resources: https://www.semi.org/en/markets-technology/book-to-bill
– Nasdaq — Book‑to‑Bill Ratio explainer: https://www.nasdaq.com/articles/book-to-bill-ratio-what-it-means-2017-10-09
– U.S. Securities and Exchange Commission (SEC) — Guidance on revenue and order disclosure (search company filings for practical examples): https://www.sec.gov
Educational disclaimer
This content is for educational and informational purposes only. It is not personalized investment advice, a recommendation to buy or sell securities, or a forecast of future performance. Always perform your own research or consult a licensed professional before making investment decisions.