Skip to main content
SpringerLink
Log in

Order backlog and its association with fundamental analysis metrics and future earnings

  • Original Research
  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

Order backlog is an important non-GAAP metric that is a leading indicator of future earnings. We explore how various fundamental analysis metrics interacted with order backlog impacts future earnings. This study examines whether future earnings predicted by order backlog is contingent on other fundamental analysis metrics, such as a sales decrease, the cash conversion cycle, asset growth, and the ratio of order backlog to sales. We find that order backlog is an even more informative leading indicator of future earnings when sales decrease, the cash conversion cycle is longer, and asset growth is higher. In contrast, we find that order backlog in the presence of a higher order backlog to sales ratio predicts lower future earnings. We also find that market participants incorporate the moderating effect of order backlog on sales decreases and the cash conversion cycle, while we do not find the same evidence with asset growth and the backlog to sales ratio. These empirical findings are important for managers who want to effectively communicate the prospects of a firm’s future profitability, and for investors who want to understand the financial fundamentals of firms with an order backlog. Overall, our findings show that the informativeness of order backlog can be conditional on fundamental analysis metrics in certain instances.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Data availability

Data are available from the public sources cited in the text.

Notes

  1. The Securities Exchange Commission (SEC) began requiring order backlog disclosures in the 10-K in 1970 when it introduced Item 101c (VIII) of SEC regulation S-K.

  2. https://www.sec.gov/news/press-release/2018-127.

  3. https://www.wsj.com/articles/get-in-line-backlog-for-big-rigs-stretches-to-2019-1534500005.

  4. https://www.wsj.com/articles/heavy-duty-truck-factory-backlogs-soar-on-surging-orders-1530783005.

  5. https://www.wsj.com/articles/backlog-and-revenue-growth-power-salesforce-results-1543356152, https://www.wsj.com/articles/ge-power-has-a-92-billion-backlog-for-new-boss-thats-a-problem-11550068479, https://www.reuters.com/article/us-caterpillar-supplychain-analysis/why-caterpillar-cant-keep-up-with-a-boom-in-demand-idUSKCN1IO0FW, https://www.ft.com/content/a495bc06-49a6-11e9-bbc9-6917dce3dc62.

  6. https://www.consumerreports.org/appliances/how-to-get-the-appliance-you-want-right-now/.

References

  • Anderson MC, Banker RD, Janakiraman SN (2003) Are selling, general, and administrative costs “sticky”? J Account Res 4(1):47–63

    Article  Google Scholar 

  • Banker RD, Chen L (2006) Predicting earnings using a model based on cost variability and cost stickiness. Account Rev 81(2):285–307

    Article  Google Scholar 

  • Banker RD, Byzalov D, Chen L (2013) Employment protection legislation, adjustment costs and cross-country differences in cost behavior. J Account Econ 55(1):111–127

    Article  Google Scholar 

  • Banker RD, Byzalov D, Ciftci M, Mashruwala R (2014) The moderating effect of prior sales changes on asymmetric cost behavior. J Manag Account Res 26(2):221–242

    Article  Google Scholar 

  • Banker RD, Basu S, Byzalov D (2016a) Implications of impairment decisions and assets’ cash-flow horizons for conservatism research. Account Rev 92(2):41–67

    Article  Google Scholar 

  • Banker RD, Basu S, Byzalov D, Chen J (2016b) The confounding effect of cost stickiness on conservatism estimates. J Account Econ 61(1):203–220

    Article  Google Scholar 

  • Banker R, Byzalov D, Fang S, Liang Y (2018) Cost management research. J Manag Account Res 30(3):187–209

    Article  Google Scholar 

  • Banker R, Byzalov D, Fang S, Jin B (2020) Operating asymmetries and non-linear spline correction in discretionary accrual models. Rev Quant Financ Acc 54(3):803–850

    Article  Google Scholar 

  • Banker RD, Liang Y (2017). Disruption of the earnings generation process and the negative relation between earnings persistence and volatility. Working Paper, Temple University, Philadelphia

  • Barber R, Hollie D (2021) Does order backlog matter for financial reporting quality? Evidence from revenue restatements. Adv Account 53:100526

    Article  Google Scholar 

  • Barth M, Li K, McClure C (2023) Evolution in value relevance of accounting information. Account Rev 98(1):1–28

    Article  Google Scholar 

  • Behn BK (1996) Value implications of unfilled order backlogs. Adv Account 14:61–84

    Google Scholar 

  • Belghitar Y, Khan J (2013) Governance mechanisms, investment opportunity set and SMEs cash holdings. Small Bus Econ 40(1):59–72

    Article  Google Scholar 

  • Beneish M, Lee C, Tarpley R (2001) Contextual fundamental analysis through the prediction of extreme returns. Rev Acc Stud 6(2–3):165–189

    Article  Google Scholar 

  • Bradshaw M, Sloan R (2002) GAAP versus the street: an empirical assessment of two alternative definitions of earnings. J Account Res 40(1):41–66

    Article  Google Scholar 

  • Bradshaw M, Christensen T, Gee K, Whipple B (2018) Analysts’ GAAP earnings forecasts and their implications for accounting research. J Account Econ 66(1):46–66

    Article  Google Scholar 

  • Campello M, Giambona E, Graham JR, Harvey CR (2011) Liquidity management and corporate investment during a financial crisis. Rev Financ Stud 24(6):1944–1979. https://doi.org/10.1093/rfs/hhq131

    Article  Google Scholar 

  • Chang C (2018) Cash conversion cycle and corporate performance: global evidence. Int Rev Econ Financ 56:568–581

    Article  Google Scholar 

  • Chang H, Chen J, Hsu S, Mashruwala R (2018) The impact of the bullwhip effect on sales and earnings prediction using order backlog. Contemp Account Res 35(2):1140–1165

    Article  Google Scholar 

  • Chen C, Lu H, Sougiannis T (2012) The agency problem, corporate governance, and the asymmetrical behavior of selling, general, and administrative costs. Contemp Account Res 29(1):252–282

    Article  Google Scholar 

  • Cooper M, Gulen H, Schill M (2008) Asset growth and the cross-section of stock returns. J Financ 63(4):1609–1651

    Article  Google Scholar 

  • Davis J, Fama E, French K (2000) Characteristics, covariances, and average returns: 1929 to 1997. J Financ 55(1):389–406

    Article  Google Scholar 

  • Dechow P (1994) Accounting earnings and cash flows as measures of firm performance: the role of accounting accruals. J Account Econ 18(1):3–42

    Article  Google Scholar 

  • Dechow P, Kothari SP, Watts R (1998) The relation between earnings and cash flows. J Account Econ 25(2):133–168

    Article  Google Scholar 

  • Dechow PM, Ge W, Larson CR, Sloan RG (2011) Predicting material accounting misstatements. Contemp Account Res 28(1):17–82. https://doi.org/10.1111/j.1911-3846.2010.01041.x

    Article  Google Scholar 

  • Dierynck B, Landsman W, Renders A (2012) Do managerial incentives drive cost behavior? Evidence about the role of the zero earnings benchmark for labor cost behavior in private Belgian firms. Account Rev 87(4):1219–1246

    Article  Google Scholar 

  • Dutta S, Trueman B (2002) The interpretation of information and corporate disclosure strategies. Rev Acc Stud 7(1):75–96

    Article  Google Scholar 

  • Ebben J, Johnson A (2011) Cash conversion cycle management in small firms: relationships with liquidity, invested capital, and firm performance. J Small Bus Entrep 24(3):381–396

    Article  Google Scholar 

  • Feldman R, Govindaraj S, Livnat J, Suslava K (2021) Market reaction to quantitative and qualitative order backlog disclosures. J Account Public Policy 40:10689

    Article  Google Scholar 

  • Francis J, Schipper K (1999) Have financial statements lost their relevance? J Account Res 37(2):319–352

    Article  Google Scholar 

  • Gu Z, Lee C, Rosett J (2005) What determines the variability of accounting accruals? Rev Quant Financ Acc 24(3):313–334

    Article  Google Scholar 

  • Hendricks KB, Singhal VR (2005) An empirical analysis of the effect of supply chain disruptions on long-run stock price performance and equity risk of the firm. Product Operat Manag 14(1):35–52

    Article  Google Scholar 

  • Hou K, Dijk M, Zhang Y (2012) The implied cost of capital: a new approach. J Account Econ 53(3):504–526

    Article  Google Scholar 

  • Hou K, Xue C, Zhang L (2015) Digesting anomalies: an investment approach. The Review of Financial Studies 28(3):650–705

    Article  Google Scholar 

  • Howorth C, Westhead P (2003) The focus of working capital management in UK small firms. Manag Account Res 14(2):94–111

    Article  Google Scholar 

  • Hribar P, Collins D (2002) Errors in estimating accruals: implications for empirical research. J Account Res 40(1):105–134

    Article  Google Scholar 

  • Ittner C, Larcker D (1998) Are nonfinancial measures leading indicators of financial performance? An analysis of customer satisfaction. J Account Res 36:1–35

    Article  Google Scholar 

  • Jiambalvo J, Rajgopal S, Venkatachalam M (2002) Institutional ownership and the extent to which stock prices reflect future earnings. Contemp Account Res 19(1):117–145

    Article  Google Scholar 

  • Jose M, Lancaster C, Stevens J (1996) Corporate returns and cash conversion cycles. J Econ Financ 20(1):33–46

    Article  Google Scholar 

  • Kalouptsidi M (2014) Time to build and fluctuations in bulk shipping. Am Econ Rev 104(2):564–608

    Article  Google Scholar 

  • Kama I, Weiss D (2013) Do earnings targets and managerial incentives affect sticky costs? J Account Res 51(1):201–224

    Article  Google Scholar 

  • Kleindorfer P, Saad H (2005) Managing disruption risks in supply chains. Prod Oper Manag 14(1):53–68

    Article  Google Scholar 

  • Lev B, Thiagarajan S (1993) Fundamental information analysis. J Account Res 31(2):190–215

    Article  Google Scholar 

  • Li K, Mohanram P (2014) Evaluating cross-sectional forecasting models for implied cost of capital. Rev Acc Stud 19(3):1152–1185

    Article  Google Scholar 

  • Lipson M, Mortal S, Schill M (2011) On the scope and drivers of the asset growth effect. J Financ Quant Anal 46(6):1651–1682

    Article  Google Scholar 

  • Mortal S, Schill M (2015) The post-acquisition returns of stock deals: evidence of the pervasiveness of the asset growth effect. J Financ Quant Anal 50(3):477–507

    Article  Google Scholar 

  • Rajgopal S, Shevlin T, Venkatachalam M (2003) Does the stock market fully appreciate the implications of leading indicators for future earnings? Evidence from order backlog. Rev Acc Stud 8(4):461–492

    Article  Google Scholar 

  • Richards V, Laughlin E (1980) A cash conversion cycle approach to liquidity analysis. Financ Manag 32–38

  • Sloan R (1996) Do stock prices fully reflect information in accruals and cash flows about future earnings? Account Rev 71(3):289–315

    Google Scholar 

  • Sloan R (2019) Fundamental analysis redux. Account Rev 94(2):363–377

    Article  Google Scholar 

  • So E (2013) A new approach to predicting analyst forecast errors: Do investors overweight analyst forecasts? J Financ Econ 108(3):615–640

    Article  Google Scholar 

  • Wang B (2019) The cash conversion cycle spread. J Financ Econ

  • Weiss D (2010) Cost behavior and analysts’ earnings forecasts. Account Rev 85(4):1441–1471

    Article  Google Scholar 

Download references

Acknowledgements

We thank anonymous conference reviewers and participants of 2019 Ohio Region Meeting and 2019 AAA Annual Meeting, Lei Gao (discussant), and Sarah Hinchliffe (discussant), and Raj Mashruwala for helpful comments and suggestions. All errors are our own. Han-Up Park thanks the Edwards School of Business for financial support.

Author information

Author notes

  1. Rajiv Banker passed away in 2023. He was a friend, colleague, and accomplished scholar. We dedicate this paper to his memory.

Authors and Affiliations

  1. Fox School of Business, Temple University, Philadelphia, USA

    Rajiv Banker

  2. CU Denver Business School, University of Colorado Denver, Denver, USA

    Russell Barber

  3. E. J. Ourso College of Business, Louisiana State University, Baton Rouge, USA

    Dana Hollie

  4. Edwards School of Business, University of Saskatchewan, Saskatoon, Canada

    Han-Up Park

Authors
  1. Rajiv Banker
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Russell Barber
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Dana Hollie
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Han-Up Park
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Dana Hollie.

Ethics declarations

Conflict of interest

The authors have no relevant financial or non-financial interests to disclose.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix A: Variable definition and construction

Appendix A: Variable definition and construction

Variable

Description and construction

ROAt+1

Income Before Extraordinary Items Available for Common Stock (Compustat IBCOM) adjusted for special items (Compustat SPI) as IBCOM − SPI × 0.65 (Bradshaw et al. 2018; Bradshaw and Sloan 2002; So 2013) for year t + 1 divided by average total assets (Compustat (ATt+1 + ATt)/2)

ROAt

ROA for fiscal year t

RETt+1

Following Rajgopal et al. (2003), we define size adjusted abnormal returns as the individual firm return minus the size-decile return available at https://mba.tuck.dartmouth.edu/pages/faculty/ken.french for the fourth month after the fiscal year-end

BKLG

Order Backlog (Compustat OB) divided by average total assets

Dec

An indicator variable being one for a sales decline in fiscal year t when Compustat REVTt < REVTt−1 and zero otherwise

CCC

Cash conversion cycle defined by the operating cycle, the sum of the days inventories outstanding and accounts receivables outstanding (Dechow et al. 1998), less days accounts payables outstanding (Wang 2019). 360 × (Outstanding Average Inventories/COGS + Average Accounts Receivables/Sales − Average Accounts Payables/COGS), where inventories (INVT), accounts receivables (RECT), accounts payables (AP), sales (REVT), costs of goods sold (COGS) are from Compustat

BTR

Ratio of order backlog (Compustat BKLG) to sales (Compustat REVT)

NEGE

An indicator variable for a loss being one when Compustat IBCOM < 0 and zero otherwise

ACC+

Magnitude of positive accruals (So 2013). We define accruals following (Sloan 1996) prior to 1988 and following Hribar and Collins (2002) starting from 1988 as in (Hou et al. 2015). Accruals prior to 1988 are defined by (ΔACT − ΔCHE) − (ΔLCT − ΔDCL − ΔTXP) − DP from Compustat where DLC, TXP, and DP are zero if missing. Accruals following since 1988 are defined as net income (Compustat NI) minus net cash flow from operations (Compustat OANCF)

ACC+

Magnitudes of negative accruals (So 2013)

AG

Asset growth defined by ΔTotal Assets (Compustat AT)/Total Assetst−1 following (Cooper et al. 2008)

DD

An indicator variable being one if Dividends for common and ordinary shares (Compustat DVC) are positive and zero otherwise

DIV

Dividends for common and ordinary shares divided by average total assets

BTM

Book value of equity following (Davis et al. 2000) divided by market value available from Compustat PRCC_F × CSHO)

Ln(MV)

log of market value available from Compustat

Leverage

Average of long-term debt and current portion of long-term debt (Compustat DLTT + DLC) divided by average total assets

*Industry-year and firm fixed effects are incorporated into each regression. We use Fama–French 48 industries.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Banker, R., Barber, R., Hollie, D. et al. Order backlog and its association with fundamental analysis metrics and future earnings. Rev Quant Finan Acc 62, 1733–1753 (2024). https://doi.org/10.1007/s11156-024-01248-6

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-024-01248-6

Keywords

JEL Classification

Search

Navigation