Book-to-bill ratio

The book-to-bill ratio compares the value of new orders a company books in a period to the value of product it actually ships and bills customers for in that same period. It's a demand signal used heavily in industries where orders and shipments don't happen at the same time, most notably semiconductors and other capital equipment industries, as well as broader industrial manufacturing.

The formula is:

A ratio above 1.0 means the company is booking more new business than it's shipping out, which means its backlog is growing and points to strengthening demand ahead. A ratio below 1.0 means shipments are outpacing new orders, so the backlog is shrinking, which can be an early sign that demand is cooling even while current revenue still looks strong. A ratio of exactly 1.0 means orders and shipments are roughly in balance.

Because it captures a shift in demand before that shift shows up in reported revenue, the book-to-bill ratio functions as a leading indicator. Industry groups often publish an aggregate book-to-bill ratio for an entire sector, such as semiconductor equipment, which investors watch as a read on where a whole cycle is heading, not just one company. Like any single ratio, it's more useful as a trend over several periods than as one reading in isolation, since order timing can be lumpy quarter to quarter.