What It Is:
A company's book-to-bill ratio measures the company's number of outstanding orders as compared with the number of shipped or fulfilled orders. The book-to-bill ratio is a valuable tool for measuring the strength of the technology sector.
How It Works/Example:
A company's book-to-bill ratio measures the company’s ability to fulfill client orders. Therefore, a company that can fulfill its orders at the pace at which orders arrive would have a book-to bill ratio of 1.
To illustrate, suppose Company E receives 200 orders (booked) for widgets. Company E subsequently ships widgets for all 200 orders (billed). Expressed as a fraction, the book-to-bill ratio is 200 (booked)/200 (billed) or 1.
Why It Matters:
Manufacturing companies receive a certain number of orders for their products. Based on production and shipping methods, companies fulfill orders at a certain pace; this can be particularly lengthy for companies in the high-tech industry. The book-to-bill ratio reflects this pace in relation to the volume of client orders and indicates two things.
The book-to-bill ratio indicates how fast a company can satisfy demand for its products. It may indicate, therefore, that a company is under-selling their product (a ratio of less than 1). It may also indicate that a company needs to invest in speeding up their production and or shipping processes (a ratio of greater than 1) to meet demand. A company that is able to fulfill orders as they arrive (a ratio of 1), on the other hand, can be said to be delivering quality service to their clients by fulfilling orders in a timely manner.