Order backlog’s effects on the industrial company’s future revenue and earnings

Abstract

This research examines order backlog’s effects on the company’s future revenue and operating profit in the 10 year period. 18 Finnish publicly listed companies are selected for this. Also economic downturn has significant effect on the company’s order backlog and the effects are evaluated. In the end research examines which companies performed best in the downturn. Evaluating changes in order backlog can help management or investors to forecast company’s future success.

Order backlog is one of the leading indicators used in revenue and profit forecasting. This indicator is used to indicate future performance for example in the heavy and high technology industries. Carefully executed order fulfillment process is necessary in managing order backlog efficiently. Process is needed in transforming order backlog’s orders to revenue. In this quantitative longitudinal research Pearson’s correlation efficient was chosen for main research method as it measures the association of two variables. Data was collected in Excel using numbers from 180 financial statements and statistical hypothesis testing was calculated in SPSS.

This research found out that order backlog, operating profit and revenue correlate to each other extreme significantly. In the downturn operating profit declines most. This is due to incapability to cut fixed and operating costs fast enough. Also revenue change is the smallest because the old order backlog is protecting it from declining in the downturn. Kone and Wärtsilä performed best in the downturn as they were the only companies with operating profit and revenue growth in the year 2009. These results to research questions suggest that changes in the order backlog should be taken very seriously in forecasting company future success.