Book to bill
Sector Deep DivesNew orders divided by revenue in the same period. Above one means the backlog is growing.
Book to bill compares what came in against what went out. At 1.10, the company booked 10% more work than it delivered, so the backlog grew and revenue should follow upward with a lag.
Below 1.0 the backlog is being consumed, and revenue will decline unless order intake recovers. Because it leads reported revenue by several quarters, it is where the turn shows up first.
It is volatile for businesses with large lumpy contracts, where one order can swing a quarter, so it is normally read on a trailing twelve month basis rather than quarter by quarter.
Together with backlog it is the core of industrials analysis: orders lead, revenue lags, and the income statement is the slowest place to learn what is happening.
Worked example
Revenue of 1,000 in the period against new orders of 1,100 gives a book to bill of 1.10, so the backlog grew by 100.
The following period revenue rises to 1,080, catching up with the earlier intake, but orders fall to 950 and book to bill drops to 0.88.
Revenue looks better in the second period while the leading indicator has already turned. That lag is why orders are watched more closely than the income statement in industrials.
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