What is TTM?
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 over the last 12 months. Since most companies report financial results every quarter and only report annual results at the end of their fiscal year, using the trailing twelve months to evaluate earnings, revenue or other metrics is extremely useful for investors.
Why TTM is important
Usually, both investors and companies tend to think of financial results on a yearly basis, but the fact is that quarterly results affect the company’s financials, and it is important to have a way of analyzing yearly results while taking into consideration the latest quarterly report.
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.
Using TTM to analyze financial metrics also helps investors, companies, and analysts to make predictions while removing factors such as seasonality, which gives them a better understanding of how the company might perform financially in the future.
Comparing just quarterly results when trying to evaluate the company’s outlook does not allow investors, management, and analysts to draw any significant conclusions. Seasonality, as well as other factors, might affect the company’s results and using a period of just 3 months to assess the company’s outlook and results is not enough.
How to use TTM
Analyzing the financial metrics over the trailing twelve months can be used to compare different stocks, and companies within the same industry, or sectors. Additionally, investors may also use TTM results to compare two completely different stocks and assess whether or not the company is growing and improving over the short term.
It can also be used by analysts and investors to make predictions and estimates based on the company’s current performance. Moreover, when it comes to valuing stocks, financial metrics measured over the last 12 months, can also provide a clearer picture as to how the company’s valuation multiples should be based on growth, and profitability metrics, such as price-to-earnings and price-to-free cash flow
Metrics evaluated on a quarterly basis fall short when creating a full picture of the company’s results because they can be directly influenced by cyclicality and seasonality. Therefore, the company’s management, investors, and analysts tend to use yearly results, as it gives them more insights.
How is TTM calculated?
TTM or trailing twelve months, which means that it refers to the previous 12 months, therefore calculating different financial metrics over the trailing twelve months may vary depending on what is being calculated. If the company issued its annual report, any TTM figures can be pulled out of the 10-K, which has all of the information regarding the fiscal year.
However, during the middle of the fiscal year, the TTM metrics vary. It can easily be calculated by adding the metric over the last 4 quarters.
So for example, if a company issues its quarterly results and a certain investor or analyst wants to analyze the company, it is always better to use TTM metrics, giving a full scope of what the results over the coming year should look like.
An example would be in calculating the revenues and earnings of the stock. Using TTM results an investor would add the revenues and earnings over the last four quarters.
Company A just reported earnings for the third quarter, with revenues coming in at $100 million, and earnings of $5 million. Over the last 3 quarters, the company had total revenues of $250 million and earnings of $20 million. By adding the last 4 quarters of revenues, and earnings we get to TTM revenues of $350M, and $25 million of earnings.
Advantages of using TTM
Using TTM as a timeframe can help investors have a broader view of the company’s financials. TTM metrics can also be compared with the company’s preceding yearly results. This is particularly useful when it comes to comparing growth yearly. Quarterly results represent a very short timeframe, 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, and 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's performance.
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 timeframe.
TTM vs YTD
It is also important to make the distinction between TTM and YTD (year-to-date). TTM represents the last 12 months, while year-to-date represents the months since the beginning of the year. While YTD is also an extremely useful metric, especially to analyze a stock’s performance, when it comes to financials, and accounting, TTM is far more useful.