# Book to Bill Ratio

The book to bill ratio is generally used by the semiconductor industry and technology sector to indicate their overall health. In general, a book to bill ratio that is greater than 1 shows a healthy industry or company; a book to bill ratio that is less than 1 shows an unhealthy industry or company.

## Book to Bill Ratio Definition

The book to bill ratio definition is fairly simple. The book to bill ratio compares the total amount of orders received to the total amount of orders filled. More simply, it’s the ratio of demand versus supply on a particular company’s ledgers. If a company has more orders than it can deliver, this ratio shows that the company is healthy. If the company has the same amount of orders as it can deliver, it is still healthy, but obviously has room to grow. Of course, if the company has fewer orders than it is able to deliver, this shows negative growth.

## Book to Bill Ratio Example

The book to bill ratio calculation will end up being a number that is either greater than 1, equal to 1 or less than 1. The following is the basic book to bill ratio formula:

OR/OD

OR is the number of orders received and OD is the number of orders delivered. A very simple book to bill ratio example would be as follows: The XYZ Semiconductor Corporation has orders on their books of 100,000 units to be shipped during one month. The actual amount of units that they are able to ship during that month is 85,000.

100,000/85,000 = 1.18

So, the book to bill ratio is 1.18, which for the XYZ Semiconductor Corporation is a very good thing. If their ratio continues to stay greater than 1 each month, they will have a healthy bottom line going into the next year. The ABC Semiconductor Corporation, however, has a problem with some of their chips, which results in bad publicity and lower than average orders. The amount of orders they have per month is 85,000, but the number of orders they can fulfill is 100,000 per month. Using our formula:

85,000/100,000 = .85

We can see that ABC Semiconductor can supply more units than there is actually demand for, which is a bad combination in any economy.

The book to bill ratio as measured in the United States is released by semiconductor companies on or about the 20th of each month by the Semiconductor Equipment and Materials Institute and it is based on the average of bookings versus billings over the previous three months. Similarly, the Semiconductor Equipment Association of Japan releases a comparable book to bill ratio for the semiconductor businesses located in Japan.

While the book to bill ratio serves as a quantitative measure of how the semiconductor industry is doing, this simple formula can also be applied to any number of businesses that sell an actual product as opposed to a service.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...