When evaluating a company’s financial performance, a metric you may encounter is referred to as the LTM or last twelve months. As can be readily discerned from the meaning of the acronym. It is an arbitrary period of time that is often cited as a trailing indicator of a firm’s financial performance.
Even so, companies tend to find this reference quite meaningful. Especially when attempting to gauge short-term successes and failures. As well as anticipate future market trends. Another useful feature of this metric is that it can be applied to almost any data point that a company wants to measure such as revenue, debt, sales, and so on.
LTM is a useful gauge for measuring the comparative performance of other market players and the extent to which a company is keeping pace or lagging behind them.
Using the LTM as a Comparative Indicator
Another popular use of the LTM metrics when evaluating a company’s performance in various fields. Using it as a comparative indicator that aligns one firm’s output with that of another. In this regard, the LTM can measure the disparity or convergence of competitors in various areas. As such, it can be used as a broad overview of the market.
While still limited in scope and thus in ultimate analytical utility. The LTM when used as a comparative metric looking at the competition can more concretely underpin trends and market developments. Similarly, disparities in metrics between competitors can point towards relative success or failure in keeping up with the competition.
Broadly speaking, firms that lag behind the competition can use the LTM to evaluate particular strategies being deployed by their competitors and how effective these were as a strategy. Investors will often compare LTM revenues with future estimates.
Here, the LTM is best used to capture big ideas and movements rather than as a way to drill down into the specific mechanics of market movements. Though inadequate on its own as a reason for justifying a strategic position. The LTM and its narrative could prove useful to a management team that needs to justify a strategic pivot or shift in the business outlook.
While often useful from the standpoint of looking at near-term events and attempting to predict trends. The LTM offers too small of a data window to be useful for massive investment or strategic decisions. Therefore, as an internal and external indicator, the LTM is only really worthwhile when speaking about previous performance. In light of current conditions for the purposes of anticipating, explaining, and predicting the next twelve months.
This is because it is a moving indicator. As such, it tends to be more current than quarterly reporting which is purely historical and often detached from the reporting period. That is, third-quarter reports are generated after the completion of, not during the second quarter. There is also the question of data accuracy when working within such short timeframes.
The advantage of historical reporting is that the data is often quite decided by that point. Whereas moving indicators can be more prone to error due to the fast-paced nature of their generation. An example of this would be having a larger than usual order placed that pushes you over last year’s mark that is then subsequently canceled. Thus giving the temporary impression that business is up when in actuality it might be down.
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