What it means
For a business that sells from stock and invoices on delivery, orders and billings move together and the ratio is uninteresting. For a business whose products take months to build, or whose contracts are delivered over years, the two diverge, and the gap is where the future lies.
Billings show what the business earned this period; bookings show what it will earn in coming periods. A period of strong billings on weak bookings is a business eating its backlog; a period of weak billings on strong bookings is a business investing in future delivery.
The ratio is watched across whole industries. The semiconductor equipment sector has published a monthly book-to-bill ratio for decades, and it is read as a barometer of the industry's direction: above 1.0 for several months signals expansion, below 1.0 signals contraction.
Individual companies report bookings, billings and backlog in their results, and analysts model future revenue from the backlog and its expected conversion rate. Definitions need care.
A booking should be a firm order: a signed contract or purchase order, not a quotation or a letter of intent. Cancellations should be deducted.
Billings should match the revenue definition used for the period, and for businesses that bill in advance or in arrears, the ratio may be calculated on revenue rather than invoices. A related measure, backlog coverage, expresses the backlog as a number of months of billings and shows how far ahead the business's revenue is secured.
The ratio also has operational implications. A sustained ratio well above 1.0 means the business is not delivering fast enough: lead times lengthen, customers wait, and capacity must be added or orders will go elsewhere.
A sustained ratio below 1.0 means capacity exceeds demand and costs must be cut or sales increased. Management uses the ratio with the backlog to decide hiring, capital expenditure and pricing.
In practice
Real-world examples.
Example
A semiconductor equipment maker reports a book-to-bill of 1.15 for three consecutive months, and its shares rise as investors anticipate revenue growth.
Example
A construction contractor with a book-to-bill of 0.7 for a year sees its backlog fall from 18 months of revenue to 11 and begins to cut its workforce.
Example
An enterprise software company reports bookings of $50 million against billings of $40 million and points to the growing backlog as evidence that its sales investment is working.
Think of it
“This ratio shows whether orders are coming in faster or slower than you're fulfilling them.
Formula
Calculation
Book-to-Bill Ratio = Value of Orders Booked in the period / Value Billed (or Revenue) in the period
Closing Backlog = Opening Backlog + Bookings minus Billings (minus Cancellations)
Backlog Coverage (months) = Closing Backlog / Average Monthly Billings
Worked example. A maker of industrial automation systems reports four quarters:
- Q1: bookings $18 million; billings $15 million; ratio 1.20
- Q2: bookings $22 million; billings $17 million; ratio 1.29
- Q3: bookings $16 million; billings $20 million; ratio 0.80
- Q4: bookings $14 million; billings $21 million; ratio 0.67
Backlog, starting the year at $30 million:
- End Q1: $30 + $18 minus $15 = $33 million
- End Q2: $33 + $22 minus $17 = $38 million
- End Q3: $38 + $16 minus $20 = $34 million
- End Q4: $34 + $14 minus $21 = $27 million
Billings grew every quarter, from $15 million to $21 million, and the year's revenue of $73 million was a record. But the book-to-bill ratio fell below 1.0 in the second half and the backlog shrank from $38 million to $27 million. Backlog coverage at year end, measured on the latest quarter's billing run rate = $27 million / ($21 million / 3) = 3.9 months, down from 6.7 months at the end of Q2 ($38 million / ($17 million / 3)). Unless bookings recover, billings will fall within two quarters, and the record year was partly the consumption of orders won earlier. An analyst reading only the revenue line would miss this; one reading the ratio would ask about the pipeline before praising the results.Case study
Seen in the real world.
A manufacturer of packaging machinery had its best-ever year, with revenue up 25% and margins at record levels, and paid its largest bonuses. Its book-to-bill ratio had been below 0.8 for the entire year, a fact reported in the monthly pack but never discussed, because the revenue and profit lines dominated the meetings. The backlog had fallen from 14 months to 6.
In the first quarter of the following year, revenue fell 30%, the factory ran at half capacity, and the company made redundancies four months after paying record bonuses. The new chief executive moved bookings and backlog to the first page of the board pack, introduced a rule that bonuses are calculated on a rolling combination of billings and bookings, and required the sales team to report pipeline coverage monthly. Her comment was that the company had spent a year celebrating the past and calling it the present.
Watch out
Common mistakes.
- Counting quotations, letters of intent or unsigned proposals as bookings. Only firm orders belong in the numerator.
- Reading a single period's ratio. Bookings are lumpy; use a rolling three- or six-month figure.
- Celebrating record billings without checking the ratio. Strong revenue on a falling backlog is the past being consumed.
Questions
People also ask.
What is a good book-to-bill ratio?
Around 1.0 means orders and deliveries are balanced. Above 1.0 signals growth ahead; sustained well above 1.0 signals delivery constraints. Below 1.0 for more than a few months signals a coming decline.
Which industries use the ratio?
Those with long lead times between order and delivery: semiconductors, aerospace and defence, capital equipment, construction, shipbuilding and enterprise software.
How does book-to-bill relate to backlog?
Bookings add to the backlog; billings draw it down. A ratio above 1.0 grows the backlog; below 1.0 shrinks it. Backlog coverage in months shows how much revenue is already secured.
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