Backlog coverage ratio

Coverage answers the question a raw backlog figure cannot: how much of the near future is already sold. Dividing backlog by the revenue expected over the next twelve months converts an absolute number into years of visibility, which is the form in which it can be compared across companies of different sizes.

Conventions differ, and the difference matters when you are comparing two companies. Some analysts divide by trailing revenue because it is observable, others by consensus or company guided forward revenue because it is the relevant denominator. In a sharp downturn the two give materially different answers, so say which you are using.

Coverage is a negotiating position as much as a forecasting tool. A company with well over a year of contracted work can decline a badly priced order when demand weakens. A company with a few months of coverage has to win work continuously and is therefore the one that discounts first, which is why coverage tends to show up in margin before it shows up in revenue.

It says nothing on its own about firmness or profitability. A long backlog full of cancellable frame call offs priced in a bid war is worse than a short one full of firm orders with escalation clauses, so coverage is the first of three questions rather than the answer.