Book-to-Bill Ratio

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Blog Author :

WallStreetMojo Team

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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Book-to-Bill Ratio Definition

The book-to-bill ratio denotes the value of new orders received by an enterprise of its goods and services against the billing in the same period.

Table of contents
  • The book-to-bill ratio indicates the new order value obtained by an enterprise of its goods and services against the billing in a similar period.
  • It indicates the demand and supply for an enterprise or industry.
  • A ratio greater than one means that the product demand surpasses the supply, and the management may increase the production speed. 
  • If the ratio is less than one, it mentions that the supply is more than the demand, and the management may lower the production.

Book-to-Bill Ratio Formula

The book-to-bill ratio, also known as the BB ratio, is calculated as follows: -

Book-to-Bill Ratio = Orders Received / Completed Orders Billed

Book-to-Bill Ratio Formula

Thus, to calculate the book-to-bill ratio, the value of new orders received is divided by the value of billing done for completed orders during the same period.

How Does It Work?

The book-to-bill ratio indicates the demand and supply for an enterprise or industry. A ratio greater than one indicates that the company is receiving new orders and thus increased demand. On the other hand, less than one indicates that the demand for the company’s products and services is declining.

In other words, a ratio greater than one indicates that the demand for products exceeds the supply, and the management can consider increasing its production speed. On the other hand, when the ratio is less than one, it indicates that the supply is more than the demand, and the management may consider lowering the production.

Examples of Book-to-Bill Ratio Calculation

Let us look at a few examples to understand the ratio better.

Example #1

A manufacturing company received an order of 10,000 units during a month, out of which the company shipped and billed 8,000 units.

Now,

Book to Bill - Example 1
  • =10,000/8,000
  • = 1.25

It shows that the company has an increased demand for its products against its earlier orders, which is good.

Example #2

There is a company which manufactures electronic units. It received 100 new orders a month while billed 120 orders (including some orders from the previous month).

Now,

Book to Bill - Example 2
  • =100/120
  • = 0.83

It shows that the company has a decreased demand for its products, which is a negative factor as its capacity is more than the demand. Also, they booked only orders amounting to $0.83 for every dollar billed by the company.

Factors that Influence Book-to-Bill Ratio

The following are the factors that influence the book-to-bill ratio: -

  • Decrease in overall demand for products in the industry: It may be possible that the overall industry has suffered due to seasonal factors, and the demand for the product declines for the entire industry. It will decrease the ratio for the industry.
  • Lockdown or strike in the company: It might be possible that the company could not complete its pending orders due to strikes by the employees in the factory. It would decrease the value of orders billed and hurt the book-to-bill ratio.
  • Negative publicity of the company: Sometimes, the image of a company goes down due to some negative news published against it. In such circumstances, the company may receive fewer new orders. It will also harm the company. On the other hand, if something works in favor of the company's image, demand will increase, and new orders will be received, leading to a better ratio.
  • Breakdown of the company's machinery and equipment: The company's productivity may be affected when there is a breakdown in its manufacturing plants. It will lead to lower completed orders, and the ratio will negatively impact.

Conclusion

The book-to-bill ratio is a critical ratio for investors. They can evaluate whether the company has good prospects by analyzing the ratio. For example, a company with a higher ratio may have more significant sales during the coming periods.

Also, it will give the investors an idea that the company is efficient in completing its orders, thus effectively utilizing its capacity.

Frequently Asked Questions (FAQs)

How to calculate book to bill ratio?

Many executives pay particular attention to the book-to-bill ratio among the many metrics since it provides a preliminary indication of the company's path, whether upward or downward. The maths is straightforward: divide the bookings (orders) by the billings (income).

What is a good book-to-bill ratio?

A book-to-bill ratio greater than 1 is a good sign of high demand in an industry. A book-to-bill ratio above 1 indicates that a company or industry received more orders or bookings than the value of goods shipped or billed, suggesting potential growth and a healthy business outlook.

Why is a book-to-bill ratio important?

The book-to-bill ratio shows how rapidly a business satisfies the product demand. It also offers a sector's strength, like aerospace or defense manufacturing. It may also be used when determining whether to purchase stock in a company.

What are book-to-bill ratio services?

The book-to-bill ratio helps companies understand the demand and supply for their goods or services. A more than 1 means more demand and less supply, and a percentage of less than 1 indicates less demand and more supply.