The earnings back log ratio is a asset usage metric which enables analysts to comprehend whether a provider can maintain its existing point of production. Sales backlog is normally utilized by company management to track performance, since businesses normally don’t discharge their own back log of orders into people.
Sales Backlog Ratio = Backlog of Orders / Sales
Note: that the earnings back log ratio is also said in dollars or units. Additionally, it ‘s additionally a metric which needs to be monitored over time with relatively short periods. By way of instance, the corporation ‘s management group will quantify this ratio to a monthly or yearly basis.
The earnings back log ratio offers company analysts who have insights in to the provider ‘s power to preserve current levels of production. The business ‘s management crew might use this advice to create longer or short duration alterations to production capacity.
For instance, when the ratio is slowly diminishing with time, then this implies the provider is over producing comparative to earnings. Frozen prices would then reflect a bigger share of production expenses, and the provider ‘s income will fall. On the flip side, when the ratio has been rising overtime, this means that production isn’t keeping up with demand. In the event the organization didn’t take action to increase production, the backlog of orders could result in delays in providing customers with product.
Although this information could also be used by the investor-analyst, companies typically do not release this information to the public. It’s also important to understand if demand for a product is seasonal. If that’s true, large swings in this metric might be considered normal.
Company A’s management team wanted to understand if the backlog of sales was increasing or decreasing over time. The company’s analysts produced the following table, and presented it to their production management team:
|Month 1||Month 2||Month 3||Month 4|
|Rolling Sales (3 Months)||15,125||15,503||15,891||16,288|
|Backlog (Month End)||11,344||11,400||11,457||11,515|
|Sales Backlog Ratio||0.75:1||0.74:1||0.72:1||0.71:1|
As the above table indicates, the sales backlog ratio for Company A has been decreasing over time, which aligns well with the process improvements they’ve instituted.