What is 'Book-to-Bill Ratio'

A book-to-bill ratio is the ratio of orders received to units shipped and billed for a specified period, generally a month or quarter. It is a widely used metric in the technology industry, specifically in the semiconductor equipment sector. Investors and analysts closely watch it for an indication of the performance and outlook for individual companies and the technology sector as a whole. A ratio of above 1 implies more orders were received than filled, indicating strong demand, while a ratio below 1 implies weaker demand.

BREAKING DOWN 'Book-to-Bill Ratio'

A book-to-bill ratio is typically used for measuring supply and demand in volatile industries such as the technology sector. The ratio measures the number of orders coming in compared to the number of orders going out. A company fulfilling orders as they come in has a book-to-bill ratio of 1. For example, Company A books 500 orders for parts and then ships and bills all 500 orders. The booked and billed orders have a ratio of 1, or 500/500.

Importance of a Book-to-Bill Ratio

The book-to-bill ratio reveals how quickly a business fulfills the demand for its products. The ratio also shows the strength of a sector, such as aerospace or defense manufacturing. It may also be used when determining whether to purchase stock in a company.

If a business has a ratio of less than 1, there may be more supply than demand. For example, Company B books 500 orders for parts, and then ships and bills 610 orders, including some orders from the previous month. The booked and billed orders have a ratio of 0.82. For every dollar of orders the company billed, only $0.82 of orders were booked that month. However, if the ratio is greater than 1, there may be more of a demand than can be efficiently supplied. For example, Company C books 500 orders for parts, and then ships and bills 375 orders. The book-to-bill ratio is 1.3, or 500/375. In contrast, a business with a ratio of 1 is meeting supply and demand adequately by shipping and billing orders as they are received.

Example of a Book-to-Bill Ratio

In June 2016, companies creating semiconductor pieces in the United States and Canada received orders averaging $1.71 billion over three consecutive months. The book-to-bill ratio was 1. Therefore, for every $100 in orders received for the month, $100 of the product was billed. The companies booked $1.75 billion in orders during May 2016, making that month 2.1% more profitable than the average bookings from April through June of that year.

RELATED TERMS
  1. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ...
  2. Accounting Ratio

    Accounting ratios, also known as financial ratios, are used to ...
  3. Combined Ratio

    Combined ratio is a measure of profitability used by an insurance ...
  4. Capitalization Ratios

    Capitalization ratios are indicators that measure the proportion ...
  5. Debt Ratio

    The debt ratio is a financial ratio that measures the extent ...
  6. Policyholder Dividend Ratio

    The policyholder dividend ratio is a measurement of the profitability ...
Related Articles
  1. Investing

    Sysco and Other Big Movers In Services

    The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ...
  2. Investing

    5 must-have metrics for value investors

    In this article, we outline the five ratios that can help value investors find the most undervalued stocks in the market.
  3. Investing

    Liquidity Measurement Ratios

    Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
  4. Investing

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  5. Investing

    Payout Ratio vs. Retention Ratio: When to Use Which

    The payback ratio and retention ratio collect different information and are useful in different situations.
  6. Investing

    The 4 basic elements of stock value

    Investors use these four measures to determine a stock's worth. Find out how to use them.
  7. Investing

    The Basics of Trading a Stock: Know Your Orders

    Taking control of your portfolio means knowing what orders to use when buying or selling stocks.
  8. Investing

    6 Basic Financial Ratios And What They Reveal

    These formulas can help you pick better stocks for your portfolio once you learn how to use them.
  9. Investing

    Key Financial Ratios for Retail Companies

    Using the following liquidity, profitability and debt ratios, an investor can gather deeper knowledge of a retail company's short-term and long-term outlook.
  10. Investing

    Debt Ratios

    Learn about the debt ratio, debt-equity ratio, capitalization ratio, interest coverage ratio and the cash flow to debt ratio.
RELATED FAQS
  1. How do the current ratio and quick ratio differ?

    The current ratio and the quick ratio are both liquidity ratios that measure how a company's ability to pay off its short-liabilities ... Read Answer >>
  2. How does ratio analysis make it easier to compare different companies?

    Learn what ratio analysis is, how investors can compare companies within the same sector using ratio analysis and how ratios ... Read Answer >>
  3. What is the formula for calculating the current ratio?

    Find out what makes up the current ratio, how to calculate it, and what the result can tell you about a potential investment. Read Answer >>
  4. What are financial risk ratios and how are they used to measure risk?

    Explore some of the primary financial risk ratios that investors and analysts commonly use to evaluate a company's overall ... Read Answer >>
Trading Center