In this article, we cover how to calculate the Book-to-Bill ratio. The Book-to-Bill ratio is the same as the order book. It measures the orders that a firm received over the orders that it has shipped. In other words, we can also say that it is the total value of orders in the order book to the total value of orders that have been billed.
How to calculate Book-to-Bill ratio?
The formula to calculate the Book-to-Bill ratio is:
Book-to-Bill ratio = Orders that have been received / Orders that have already been shipped
The ratio is closely watched by investors & analysts as the ratio provides us insights on how well a business performs over coming quarters. A ratio of greater than one means that the business is currently in the growth phase. While a ratio of less than signifies the business is losing its momentum.
Let’s understand it with the help of an example.
Case I. Company ABC, Inc. received 500 orders for a product in the previous quarter. In the same quarter, it managed to ship and bill 750 orders. So, for the previous quarter:
Book-to-Bill ratio = 500/750 = 0.66
Case II. Company ABC, Inc. received 1500 orders for a product in the previous quarter. In the same quarter, it managed to ship and bill 1250 orders. So, for the previous quarter:
Book-to-Bill ratio = 1500/1250 = 1.2
While a Book-to-Bill ratio of one suggests that the company is able to fulfill its orders. The supply matches the demand for products. Whereas, when it is one, it suggests the demand outstrips supply. The higher the ratio, the higher will be the demand.
On the other hand, a Book-to-Bill ratio of less than one shows that businesses can struggle to maintain growth in coming quarters.
In conclusion, the Book-to-Bill ratio acts as an early warning indicator. If it is less than one then the capacity of the business is underutilized. Whereas, if it’s greater than one then the business has to increase its capacity to fulfill demand.
