CluenexWhat is order backlog?
Order backlog is the total value of customer contracts a company has signed but not yet delivered or recognized as revenue. It is a snapshot of work already won and waiting to be done.
Companies with long projects report it most: defense contractors, aerospace firms, construction and engineering groups, industrial equipment makers and some software companies. Software firms often call a similar number remaining performance obligations, or RPO.
The US accounting rule behind it (ASC 606) requires public companies to disclose the amount of revenue they expect from remaining performance obligations. That is why backlog-like figures appear in SEC filings.
Why does backlog matter more than a contract headline?
Backlog adds up every signed contract, while a headline shows one deal at one moment. A single announcement can be large, but it may be small next to a backlog built over years.
It also shows what is left to deliver. If a company announces a $2 billion award but its backlog fell that quarter, the award did not keep up with the work being finished.
Headline totals can also mislead because they often cover several companies, several countries and delivery over many years. A $50 billion alliance-wide figure does not mean $50 billion of revenue for one firm next year.
What is a book-to-bill ratio?
Book-to-bill is new orders won in a period divided by revenue billed in the same period. Above 1.0, the backlog is growing. Below 1.0, it is shrinking.
Worked example with made-up numbers:
| Item | Amount |
|---|---|
| Starting backlog | $100 million |
| New orders in the quarter | $30 million |
| Revenue delivered in the quarter | $20 million |
| Ending backlog | $100M + $30M - $20M = $110 million |
| Book-to-bill | $30M / $20M = 1.5 |
A single quarter can be noisy because one big order can swing it. Look at four quarters or more.
How many years of revenue does backlog cover?
Divide backlog by the last twelve months of revenue. The result is roughly how many years of sales are already booked.
Example: a company with $120 billion of backlog and $60 billion of annual revenue has about 2.0 years of coverage ($120B / $60B). That is a rough guide only, because deliveries are not even and some orders stretch for a decade.
Compare coverage with the company's own history and with direct rivals. A normal level for a shipbuilder is not normal for a software firm. See how to compare two rival companies for fair comparisons.
Where do you find backlog in filings?
Look in the annual report (10-K) and quarterly report (10-Q). Search for "backlog" or "remaining performance obligations" in the business description, the MD&A (management's discussion and analysis) and the revenue note. Earnings releases and calls often give the headline figure too.
The 10-K guide shows where each section sits. Check the definition each time, because companies differ on key points:
- Funded vs unfunded: For US government work, funded backlog is backed by money Congress has appropriated. Unfunded backlog is not yet backed by it, so it is less certain.
- Options: Some firms count unexercised contract options, others do not.
- Cancelable orders: Some orders can be canceled with little or no penalty.
- Time frame: Some companies include only the next 12 to 24 months.
A backlog number is only comparable between companies if the definitions are close.
What does a recent example look like?
RTX's 2023 annual report (filed with the SEC in early 2024) reported a total backlog of about $196 billion, with roughly $127 billion commercial and $69 billion defense. Lockheed Martin's 2023 10-K reported a record backlog of about $160.6 billion. Both are examples of the scale of backlog at large aerospace and defense firms, not signals about any stock.
For current figures, open the latest 10-Q or earnings release for the company you care about, since backlog changes every quarter.
Where does backlog fail as a signal?
Backlog is not revenue, profit or cash. Several things can break the link between a big backlog and a good result.
- Cancellations and delays: Customers can cancel, push out deliveries or renegotiate, especially in cyclical industries.
- Thin or negative margins: Fixed-price contracts signed years ago can lose money if costs rise. A large backlog of low-margin work adds little profit.
- Capacity limits: A company may be unable to build fast enough. Parts, labor or factory space can be the bottleneck, so backlog converts slowly.
- Definition changes: A rising backlog can come from counting more things, not winning more business.
- Currency effects: For global firms, exchange rates can move reported backlog without any new orders.
- Already priced in: Stock prices react to surprises compared with expectations. A record backlog can still come with a flat or falling stock if investors expected it.
Backlog also matters little for businesses that sell quickly with no long contracts, such as most retailers.
What this means for you
If you own or follow a company that reports backlog, a few habits make the number useful.
- Read the definition in the filing, including funded versus unfunded and whether options are counted.
- Track backlog and book-to-bill for at least four quarters, not one.
- Calculate coverage (backlog divided by annual revenue) and compare it with the company's own past and its closest rivals.
- Check profit margins on the same page. Growing backlog with shrinking margins is a warning.
- When a big deal headline appears, ask how many companies, countries and years it covers before treating it as news for one stock.
On Cluenex, each stock has a free public page at cluenex.com/stocks/ showing business quality, including profitability and growth checks, which you can read next to the backlog figures from the filings. Free cash flow and the balance sheet show whether the company can fund the work it has booked.