# Book-to-Bill Ratio: Definition, How It's Calculated, and Example

## What Is the 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 this ratio for an indication of the performance and outlook for individual companies and the technology sector as a whole. A ratio above one implies more orders were received than filled, indicating strong demand, while a ratio below one implies weaker demand.

### Key Takeaways

• Book-to-bill ratio is the ratio of orders received to units shipped and billed for the period.
• A ratio above one means more orders were received than filled, indicating strong demand.
• A ratio below one means more orders were shipped than received during the month, indicating diminishing demand.

## The Formula for the Book-to-Bill Ratio:

The formula to calculate book-to bill ratio is:

$\text{Book to Bill} = \frac{\text{Orders Received}}{\text{Orders Shipped}}$

## Understanding the 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 immediately 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 one, or 500/500.

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.

## What Is the Difference Between Bookings and Billings?

Bookings represent a customer's intent to commit to a purchase from your business. Billings represent the collection of your customer's money when the purchase is complete.

## What Is a Good Book-to-Bill Ratio?

A book-to-bill ratio greater than 1 is typically considered to be a good sign of high demand in an industry. However, it is important to know which performance indicator you are interested in. If you need to know whether a business has enough supply to cover demand, a book-to bill ratio of exactly 1 means it is meeting its customer's demand in a timely manner.

## Why Would a Company Have a Book-to-Bill ratio Less Than 1?

A company may have a book-to-bill ratio less than 1 if it is shipping out more units than it has received orders for in the current period, whether that's a month or a quarter, etc. If a company ships out more units than it receives orders for in the same period, it means it is fulfilling orders from a previous period. That is indicative of a decreasing demand for the product.

## The Bottom Line

The book-to-bill ratio can help managers and investors learn whether a company is meeting demand, has more demand for its products than it is filling, or has more supply of its products than demand for them. This metric is used widely in the technology industry and helps assess the performance and outlook of individual companies and of an industry sector as a whole.

Article Sources
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1. Trinity University School of Business. "Timely Industry Information as an Assurance Service: Evidence on the Information Content of the Book-to-Bill Ratio."

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