The sales backlog ratio is an asset utilization metric that allows analysts to understand if a company is able to maintain its current level of production. Sales backlog is typically used by company management to track performance, since companies normally do not release their backlog of orders to the public.
Sales Backlog Ratio = Backlog of Orders / Sales
Note: the sales backlog ratio can be stated in either dollars or units. It's also a metric that should be tracked over time using relatively short intervals. For example, the company's management team may measure this ratio on a monthly or quarterly basis.
The sales backlog ratio provides company analysts with insights into the company's ability to maintain current levels of production. The company's management team would use this information to make short or longer term adjustments to production capacity.
For example, if the ratio is decreasing over time, this indicates the company is over-producing relative to sales. Fixed costs would then represent a larger share of production costs, and the company's profit margins would decrease. On the other hand, if the ratio were increasing over time, this indicates production is not keeping up with demand. If the company 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.