The book to bill ratio is the value of orders taken over a specified period of time (usually one month), divided by the value of orders billed (or shipped).
A ratio above 1.0, indicating more orders taken than shipped, is generally viewed as bullish while a ratio below 1.0 is generally viewed as bearish. (Above 1.0 indicates a growing backlog).
The book to bill we are talking about here is for the semiconductor industry.
It is only an indicator, and many people place little value on this ratio, for a number of reasons. First, it doesn't tell you the strength or weakness of any one particular company, only the group.
Also, if companies are slow to ship products, this lowers the BILL, thereby artifically raising the Book/Bill ratio. But being slow to ship is not a good thing. Likewise, if companies are turning around orders quickly, thereby raising the BILL, this lowers the ratio. But shipping quickly is good.
Finally, all this means nothing if you aren't making a profit on your sales.
During most of 1995, the book to bill was very strong, usually above 1.10, and we saw a good market for tech stocks. The ratio started declining in late 1995, and tech stocks started taking a dive. A ratio below 1.0 existed for much of 1996, but during the last three months has been very good, and you are seeing a comeback in semiconductors and other tech stocks. However, for many equipment semiconductor companies, like Applied Materials, you are likely to see not-so-great quarters for a while. Still, its stock value has risen quite nicely lately (because investors see a turn-around).
The best numbers to pay attention to are sales, earnings, and growth rates. (Still, I like the recent trend in book to bill.)
Doug |
