TTM is a widely used acronym in finance. It means trailing twelve months, and it is commonly used to refer to a company’s results, or operational metrics. Since most companies report financial results every quarter and only report annual results at the end of their fiscal year.
Trailing twelve months is a very important time frame that allows investors to make yearly projections based on the trailing twelve months. Companies are also fond of using the TTM because it shows investors if they are making progress on a certain aspect of their business.
Why do investors, and companies use TTM?
Usually, both investors and companies tend to think of financial results on a yearly basis. This is the main reason why TTM is widely used. Since most companies will often report quarterly results, using TTM allows companies and investors to extrapolate yearly results based on the most recent quarterly results.
Trailing twelve months also shows how well a particular company is doing based on different metrics. Investors often compare the company's results and operational metrics, and quarterly comparisons might not be the best. The reason is that three months is not enough to make any definitive conclusions.
This is because a particular company might have some quarters seasonal influence in their results. That is why using a period of just three months to compare results is inefficient. For that reason TTM allows investors to have a better assessment of the company’s financial results.
How to use it?
Investors can use the trailing twelve months to compare different metrics. It is an especially useful time frame to compare with yearly results or metrics. Investors often use it to compare revenues, net income, and any metric they might find appropriate.
It is also extremely useful to compare against peers or to compare different sectors. TTM is particularly important to use when you want to analyze growth and to compare estimates with the company’s financial results.
Comparing valuation metrics, using a TTM time frame is also very useful. Investors that want to value a stock, might choose to use trailing twelve months ratios and metrics. They provide a more comprehensive understanding of the company than using rations and metrics on quarterly results that might be affected by cyclicality and seasonality.
Advantages of using TTM?
Using TTM as a time frame can help investors have a broader view of the company’s financials. You are able to compare the company’s metrics over the trailing twelve months with yearly results. This is particularly useful when it comes to comparing growth yearly. Quarterly results tend to portray a very short time period, and using TTM can give investors a more accurate picture of the company’s financials.
In terms of analyzing a company’s performance, trailing twelve months is also much more useful than yearly results. Since financial statements for yearly results are published at the end of each fiscal year. Many companies use TTM as a way to show investors their progress. It is also extremely useful when it comes to M&A.
TTM also reduces the impact of seasonality, and cyclicality of quarterly results. Three months is a very short period of time, and quarterly results might not give a fair assessment of the company. For that reason trailing twelve months' results and metrics, give a much clearer picture of the company’s operations.
It is also a very useful time period for dividend investors. With growing dividend stocks it is always better to analyze TTM yield than use the annual dividend yield. This allows dividend investors to understand what the dividend yield might be in the future twelve months.
Disadvantages of using TTM?
There is one major disadvantage of using trailing twelve months to compare financial results and metrics. If over the last twelve months, the company’s results were driven by short-term changes, the TTM might reflect that. This can give investors an inaccurate perception of the company’s results. Although twelve months is a much larger time frame, than three months, it is still a very short time frame.
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