DEFINITION of 'Book To Ship Ratio'

The book to ship ratio measures the ratio of orders being shipped for immediate delivery, and therefore billed, to orders booked for future delivery. This ratio can be used to help measure a company's efficiency and can be used to identify potential problems in internal and external supply chains.

BREAKING DOWN 'Book To Ship Ratio'

If the book to ship ratio is greater than one, it indicates that the company has not sent out all orders. This could indicate a shortage or backorder of needed supplies. If it is one, the company is directly on time; if it is below one, the company has excess inventory on hand. For example, if incoming orders for the quarter were $50 million and shipments for the quarter were $100 million, the book to ship ratio would be 50%. If this company is making a simple product like widgets, which have quick turnaround times from order to shipment, then this low book-to-ship ratio could be indicative of problems in either manufacturing or shipping.

The book-to-ship ratio is the inverse of the related ratio, book-to-bill. Each value can be of particular importance for certain industries. For instance, the book-to-ship ratio (or book-to-bill) is released monthly for the semiconductor industry. Analysts and strategists like this measure because it offers a clear and effective indication of whether orders for chips are rising or falling and at what price. Long and short-term estimates can then be derived for chip demand, which can drive stock prices for semiconductor and technology stocks alike.

These estimates can further feed into economic outlooks and trade policymaking. The book-to-ship ratio is considered an important leading indicator of demand trends. Leading indicators are indicators that usually, but not always, change before the economy as a whole change. They are therefore useful as short-term predictors of the economy; they also have longer-term secular predictive value as well.

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