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Book-to-Bill Ratio

Sigma Investment Counselors

January 17, 2019

The book-to-bill ratio is a measure of the relationship between the amount a company bills over a specific period (a month, a year, etc.), and new orders.  To the extent that new orders exceed or fall short of current revenues, backlogs increase or fall.

A book-to-bill ratio higher than one means that more orders were received than filled during the period.  Conversely, a book-to-bill ratio of less than one could be cause for concern.  Thus, the book-to-bill ratio is generally considered an important leading indicator of demand trends.

For example, during 2017, Boeing’s commercial aircraft division delivered a record 763 jetliners.  During the same period, the company booked net new orders for 912 planes, a book-to-bill ratio of 1.2.  As a result, the company boosted monthly production of its best-selling 737 by five, to 52 in 2018, and by an additional five airplanes a month in 2019.  The company also scheduled an increase in monthly output of its 787 Dreamliner’s, to 14 in 2019, compared to 12 in 2018.

Investors should be alert to changing trends in the relationship between net, new orders and current sales, as this can be an excellent harbinger of future sales, production schedules, capital spending, and staffing.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

 

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