When Production Backlog and Contemporaneous Accounting Measures are more Informative in Predicting Future Firm Performance

Abstract

Production backlog (a.k.a. order backlog) is an important non-GAAP metric that is a leading indicator of future firm performance. We explore how various factors interacted with production backlog leads to potentially unexpected relationships in predicting future earnings. This paper documents that an additional unit of production backlog predicts a more significant increase in return on assets when the firm also reports a sales decrease, the cash conversion cycle is longer, or asset growth is higher. Conversely, an additional unit of production backlog predicts a less significant increase in return on assets when the firm has a higher ratio of production backlog to sales. We also find that an additional unit of production backlog predicts higher stock returns when the firm also reports a sales decrease and when the cash conversion cycle is longer. Our findings provide important insights into how production backlog conditioned on historical accounting measures (i.e., changes in sales, cash conversion cycle, asset growth, and a production backlog to sales ratio) predicts future firm performance.