What Is the 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.
- The book-to-ship ratio measures the total value of orders being shipped to the total value of orders placed with a company.
- The book-to-ship ratio helps a company evaluate the efficiency of its production process and supply chain as well as its ability to meet the demand for its products.
- A book-to-ship ratio of 1 indicates a company is meeting its orders in a timely fashion, a book-to-ship ratio greater than 1 indicates a company is not meeting its orders quickly enough and needs to reevaluate its processes, while a book-to-ship ratio below 1 indicates excess inventory.
- The book-to-ship ratio is similar to the book-to-bill ratio which measures the number of orders being placed to the number of orders being shipped as opposed to the monetary value of the orders.
- If a company has difficulty meeting the demand for its products in a timely fashion, this can significantly impact its profitability, particularly as it relates to customer retention.
Formula and Calculation of the Book-To-Ship Ratio
The formula for the book-to-ship ratio is:
Book-To-Ship Ratio=Value of Orders ShippedValue of Orders Receivedwhere:Value of Orders Received =Monetary value of all salesin a given periodValue of Orders Shipped =Monetary value of allpurchased products shipped in a given period
What the Book-To-Ship Ratio Can Tell You
If the book-to-ship ratio is greater than one, it indicates that a company has not sent out all of its orders. This could indicate a shortage or backorder of needed supplies or it could indicate that the company's production or shipping processes are too slow. 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 $100 million and shipments for the quarter were $50 million, the book to ship ratio would be 2, indicating that the company is not filling all of its orders in a timely fashion.
If the company is making a simple product like widgets, which have quick turnaround times from order to shipment, then this high book-to-ship ratio could be indicative of problems in either manufacturing or shipping.
It could also simply mean that its current production process simply cannot handle the demand levels for its product, which would require it to expand its production capabilities if it wants to meet this demand. The book-to-ship ratio is a strong indicator of efficiency.
If a business is continually failing to meet its deliveries on time, then this could have severe consequences. Customers may be frustrated with the lengthy delivery times and seek out faster suppliers, resulting in the company losing business.
The Difference Between the Book-To-Ship Ratio and the Book-To-Bill Ratio
The book-to-ship ratio is presented in a monetary fashion whereas the book-to-bill ratio is presented as an order, or inventory, fashion, both comparing a company's ability to fulfill its orders in a timely manner. Each value can be of particular importance to certain industries, but in essence, they both provide the same information.
Example of How to Use the Book-To-Ship Ratio
As an example of the ratio's usefulness in evaluating an industry, assume the book-to-ship ratio (or book-to-bill) is released monthly for the semiconductor industry.
Depending on the average number of the book-to-ship ratio for the companies evaluated, analysts and strategists are given 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.
For example, if the average book-to-ship ratio for the semiconductor industry was less than 1, this would indicate that there is excess supply, meaning that demand has not been high for semiconductors. This may cause investors to be bearish on semiconductor stocks.
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 changes. They are therefore useful as short-term predictors of the economy.