Book-To-Ship Ratio

What Is the Book-To-Ship Ratio?

The book-to-ship ratio measures the ratio of orders being shipped for immediate delivery, and therefore billed, to orders booked for future delivery. This ratio can be used to help measure a company’s efficiency and identify potential problems in internal and external supply chains.

Formula and Calculation of the Book-To-Ship Ratio

The formula for the book-to-ship ratio is:

Book-To-Ship Ratio = Value of Orders Received Value of Orders Shipped where: Value of Orders Received  = Monetary value of all sales in a given period Value of Orders Shipped  = Monetary value of all purchased products shipped in a given period \begin{aligned} &\text{Book-To-Ship Ratio} = \frac { \text{Value of Orders Received} }{ \text{Value of Orders Shipped} } \\ &\textbf{where:} \\ &\text{Value of Orders Received } = \text{Monetary value of all sales} \\ &\text{in a given period} \\ &\text{Value of Orders Shipped } = \text{Monetary value of all} \\ &\text{purchased products shipped in a given period} \\ \end{aligned} Book-To-Ship Ratio=Value of Orders ShippedValue of Orders Receivedwhere:Value of Orders Received =Monetary value of all salesin a given periodValue of Orders Shipped =Monetary value of allpurchased products shipped in a given period

What the Book-To-Ship Ratio Can Tell You

If the book-to-ship ratio is greater than 1, then it indicates that a company has not sent out all of its orders. This could indicate either a shortage or back order of needed supplies or that the company’s production or shipping processes are too slow. If it is 1, then the company is directly on time; if it is below 1, then the company has excess inventory on hand.

For example, if incoming orders for the quarter were $100 million and shipments for the quarter were $50 million, then the book-to-ship ratio would be 2, indicating that the company is not filling all of its orders in a timely fashion.

If the company is making a simple product like widgets, which have quick turnaround times from order to shipment, then this high book-to-ship ratio could be indicative of problems in either manufacturing or shipping.

If a business is continually failing to meet its deliveries on time, then this could have severe consequences. Customers may be frustrated with the lengthy delivery times and seek out faster suppliers, resulting in the company losing business.

The Difference Between the Book-To-Ship Ratio and the Book-To-Bill Ratio

The book-to-ship ratio is similar to a related financial ratio, book-to-bill, which compares the orders received by a company to the orders shipped.

The book-to-ship ratio is presented in a monetary fashion, whereas the book-to-bill ratio is presented as an order, or inventory, fashion, both comparing a company’s ability to fulfill its orders in a timely manner. Each value can be of particular importance to certain industries, but in essence, they both provide the same information.

Example of How to Use the Book-To-Ship Ratio

As an example of the ratio’s usefulness in evaluating an industry, assume the book-to-ship ratio (or book-to-bill) is released monthly for the semiconductor industry.

Depending on the average number of the book-to-ship ratio for the companies evaluated, analysts and strategists are given a clear and effective indication of whether orders for chips are rising or falling and at what price. Long- and short-term estimates can then be derived for chip demand, which can drive stock prices for semiconductor and technology stocks alike.

For example, if the average book-to-ship ratio for the semiconductor industry was less than 1, then this would indicate excess supply, meaning that demand has not been high for semiconductors. This may cause investors to be bearish on semiconductor stocks.

These estimates can further feed into economic outlooks and trade policymaking. The book-to-ship ratio is considered an important leading indicator of demand trends. Leading indicators are indicators that usually, but not always, change before the economy as a whole changes. They are therefore useful as short-term predictors of the economy.