When valuing a company, the number one imperative, use the most up-to-date numbers we can find. Numbers such as prices constantly update in the markets. But the accounting inputs we use come from accounting statements such as the income statement, and those don’t update on a constant basis.
So what is the answer? The challenge as investors remains to get those financial statements as updated as we can, keeping in mind that in the U.S., companies update their income statements once every three months, at best.
The answer is a method known as the TTM or trailing twelve months.
For example, we are trying to value Apple, and they released the latest 10-k in November, but it’s October. We can go back to the last 10-k from 2019, or we could guess using the latest quarterly report, or even better, we could take the latest quarterly report and take all the numbers and multiply them by four.
None of those options are the best; a better bet is to use the trailing twelve-month method of finding our closest correct numbers.
In today’s post, we will learn:
Okay, let’s dive in and learn more about TTM finance and how it impacts our company analysis.
What is TTM in Finance?
The trailing-twelve-month term used in finance describes the past twelve months of its financial performance. The twelve months highlighted don’t’ always coincide with the ending of the fiscal period for the company.
For example, the TTM may be a combination of the six months before ending the fiscal period and the following six months past the beginning of the new fiscal period.
Many analysts and investors use the TTM to analyze a large sweep of financial data, such as income statement figures, balance sheet figures, and cash flow statement figures.
The methodology of calculating the TTM may differ from one statement to the next.
Some analysts report earnings quarterly, while others do them annually.
But investors looking to value companies based not governed by these schedules often look to the TTM to fill that need. The TTM is often the most updated to date figures and is seasonally adjusted.
Investors use TTM numbers in ratios such as the P/E ratio. The price/earnings ratio comes in many flavors, such as P/E FWD (forward), P/E TTM, or P/E GAAP (Generally Accepted Accounting Principles).
Using the TTM figures allows you to determine the most current calculation of the P/E ratio. We can calculate the ratio by dividing the current market price by the company’s trailing twelve-month earnings per share.
Using relative valuations requires comparing multiples across industries, sectors, and companies. The best way to ensure your multiple compares apple to apple, use the most current numbers or TTM.
Comparing a forward P/E to a TTM P/E can lead to errors in valuation because of not basing those multiples on similar numbers.
For example, look at the different P/E ratios available for Apple:
- P/E TTM – 37.52
- P/E FWD – 31.12
Notice a wide gap between the two and how much that would throw off your valuations.
A better method of analyzing the financial statements simultaneously remains using TTM or trailing twelve months for each period you analyze.
For example, suppose you noticed that your company had revenues of $500 million during a previous TTM. In that case, it is even more brilliant if you notice that the company grows revenues to $1 billion in the next comparable period.
TTM vs LTM
LTM or the last twelve months refers to the period immediately preceding the twelve months. Also known as the trailing-twelve months.
Many companies will reference LTM regarding debt-to-equity (D/E) metrics or revenues in their financial performance.
In the grand scheme of things, twelve months is not a long time to evaluate a company. A better time frame is five to ten years, but in the short-termism of Wall Street, LTM or TTM is quite common.
The most beneficial impact of TTM is that it indicates a company’s most recent performance. And when used in conjunction with longer-term comparisons gives you a useful framework.
Another benefit of TTM numbers is that they help smooth out any seasonal changes to performance, possible short-term price volatility, and in more recent times, short market swings.
Think about the impact of the holiday seasons on retail or summer vacations in the travel industry. If you focus on the quarterly results in June or December, your analysis might skew higher or lower than reality. Using TTM helps smooth out those variations.
TTM or LTM numbers provide updated metrics from the metrics reported by the company’s annual or quarterly reports.
In essence, trailing-twelve months or TTM is interchangeable with the last twelve months or LTM. And much of it will depend on the different companies and how they choose to report their numbers.
Okay, now that we see the basics of TTM in finance, let’s figure out how to calculate TTM.
How is TTM Calculated?
When reviewing figures shown in the trailing twelve months, investors should never assume those numbers coincide with the company’s most recent fiscal year.
Companies file their financial documents at the company’s fiscal year-end. The numbers listed refer to the last twelve months ending on the last day of the month for the financial statement. For example, June 30 or December 31.
For example, in a financial statement dated March 2020, the last twelve months’ numbers cover the period from April 1, 2019, through March 31, 2020.
As we mentioned earlier, not all financial statements remain equal when calculating the TTM. For example, companies create the income statement and the cash flow statement quarterly and represent their current progress.
The balance sheet reports a twelve-month measure, as the balance sheet contains a snapshot in time, and Visa calculates the balance sheet every quarter.
Analysts treat line items from the cash flow statements, such as working capital, capital expenditures, and dividends, as feeders for other financial statements.
Working capital gives us a great example of these calculations, which comes from items on the balance sheet, and then averaged. But, analysts deduct depreciation from income quarterly and then look at the last four quarters reported on the income statement.
The simplest way to calculate numbers from the trailing twelve months remains by adding the three-month periods that divide the fiscal year by the previous four quarters.
For example, let’s start with the most recent quarter. To make a TTM calculation in October 2020, we would begin with Q3, which ended in September 2020.
Next, we add on the preceding three quarters; simple, huh?
There is another possible calculation you could try, albeit a bit more complicated.
It comes down to this: we start with the annual report or 10-k, add the reports for any quarters following the annual report, and subtract the corresponding quarterly from the annual report.
Here is what that method would look like if we used the TTM for October 2020.
And finally, we could use the following formula to achieve the same result.
Using this version of the formula enables us to only look at three documents:
- The latest 10-k or annual report
- The quarterly or 10-q report for the first nine months of 2019, issued around October
- The quarterly or 10-q report for the first nine months of 2020, issued around October
Let’s roll with a company to see how this lays out.
How about we use Amazon (AMZN) as our guinea pig? Amazon’s fiscal year ends in December, so we can plan out the financials we need to access to find our numbers for Amazon’s TTM earnings.
If we are looking at analyzing the company in November and want the most recent earnings to analyze, our TTM will line up as the following:
- For the first nine months of 2021, we look at the first quarterly report, which ended 3-31-2021
- The 10-k report, which ended 12-31-2021
- The first three months of 2022, which ended on 3-31-2022
Now, if we access those documents, we get the following numbers:
2021 Q1 | 2021 10-k | 2022 Q1 |
Page 4 | Page 38 | Page 4 |
$8,107 | $33,364 | ($3,844) |
Now that we have all of our numbers, we can plug them into our formula and determine the TTM net income for Amazon in November 2020.
TTM net income = $33,364 – $8,107 + ($3,844) = $21,413
Below is a simple TTM calculator you can download to make these calculations easier, I included other line items such as revenues, interest expense, and operating income, but you could add any line items you wish and use the created calculations to make the process easier.
That was kind of simple and fun, to be honest. And if we wanted to know the current earnings per share or EPS for the TTM, we locate the shares outstanding from the same income statement ending 3-31-2022 and divide them by the TTM net income.
TTM EPS = Net Income TTM / Shares Outstanding
TTM EPS = $21,413 / 504 = $42.49 per share
The above is a great example of calculating TTM and how it is best to find the latest numbers for our use of analysis.
There are numerous forms of calculations to find the data, but it is best to access the fewest number of filings, reducing my chances of screwing up!
The bottom line, use whatever pattern works best for you and stick with it; as long as you are using numbers from the last twelve months, the configuration doesn’t matter.
Uses of TTM in Finance
Using the TTM figures effectively analyzes the most recent financial information regarding a company in an annualized way.
Annualized information is important because it helps smooth out seasonality impacts and dilutes any non-recurring revenues or expenses, such as temporary changes in revenues, cash flows, or expenses.
We can use the TTM calculations across any metric or line item you wish to analyze, such as:
Revenues |
Earnings |
Free Cash Flow |
Margins, i.e., gross, operating, and net |
Working Capital |
As analysts and investors, we can keep a running tab of the above metrics, which can help us understand how our company is doing at any given time in the year. And it allows us to compare apples to apples.
By looking at the TTM, we can smooth out the seasonal or non-recurring impacts, and better view Amazon’s continuous performance.
For example, if we look at the comparison of Amazon’s TTM net income compared to the latest annual report:
- 2019 10-k net income – $11,588
- TTM 2020 Q3 net income – $17,377
In and of itself, that doesn’t tell us much, other than the company appears to have grown its net income, but if we look at the earnings per share, we can get a better idea.
- 2019 10-k earnings per share – $23.01
- TTM 2020 Q3 earnings per share – $34.15
As we can see, there was earnings growth in that period, and the company also diluted its shares; in other words, they increased their share count, which should lower earnings, but instead, the earnings grew.
When analyzing financials, all publicly traded companies financial results are only released quarterly per the SEC and GAAP (generally accepted accounting principles).
Companies submit the fillings approximately 30 days after a financial period, depending on each document’s release scheduling.
These financial documents make the reporting of trailing twelve-month metrics or ratios possible. Still, they are not required as the financials are updated every quarter, such as the income statement.
The bonus of using TTM numbers is the ability of analysts to see how the company is performing on an annual basis without having to wait for the annual report filing.
Using the TTM for single line items, we can build models that calculate these numbers for every line item of the income statement.
Building these models allows us to see a complete picture of the company at any given point in the year. It is a great way to value companies, compare their growth, and see any leadership initiatives progress.
As investors, we always want the most recent information to analyze, value, and determine whether an investment is a good one at this time.
Keep in mind that SEC filings only report quarterly or annual financial results rather than the TTM. However, some companies report the TTM numbers in company talks or notes, as GAAP accounting rules do not strictly regulate those areas.
Also, the quarterly or 10-q reports are not GAAP audited, so there is some flexibility there as well.
Final Thoughts
As investors, having access to the latest and greatest data helps us make better decisions. And the use of financial filings such as the income statement should be our first resource. Sometimes, waiting for the next filing is not a choice and analyzing a company mid-year means we need to either outdated info or guess.
A better way remains using the TTM numbers, which you can calculate by using a mix of annual reports and quarterly reports. And always making sure we are using twelve-month numbers or four quarters’ worth of financials.
Along with using the SEC documents, you can cheat, if it is quicker and easier to use your favorite financial website, such as:
Both of which provide up-to-date TTM numbers across all line items, which is extremely helpful in calculating TTM cash flows or net incomes.
We will wrap up our discussion on TTM finance and how we calculate our numbers.
Thank you for reading this post, and I hope you found something of value on your investing journey. If I can be of any further assistance, please don’t hesitate to reach out.
Until next time, take care and be safe out there,
Dave
