When valuing a company, the number one imperative is to use the most up-to-date numbers we can find. Numbers, such as prices, are updated constantly by the markets. But the accounting inputs we use come from financial statements such as the income statement, and those are not updated on a constant basis.
So what is the answer? The challenge as investors is to try to get those financial statements as updated as we can, keeping in mind that in the U.S., companies update their income statement once every three months, at best.
The answer is a method known as the TTM or trailing-twelve months.
For example, let’s say we are trying to value Apple, and the latest 10-k will be released 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:
- What is TTM in Finance?
- TTM vs LTM
- How is TTM Calculated?
- Uses of TTM in Finance
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 is used in finance to describe the past twelve months of its financial performance. The twelve months highlighted are not always coinciding 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 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 are seasonally adjusted.
TTM numbers are available for use in ratios such as the P/E ratio. The price/earnings ratio comes in many different 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. That ratio is calculated by dividing the current market price by the company’s trailing-twelve-month earnings per share.
Using relative valuations requires you to compare multiples across industries, sectors, and companies. The best way to ensure your multiple comparisons are apples-to-apples is to ensure you are using 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 is to analyze the financial statements simultaneously, TTM, or trailing-twelve months for each period you are analyzing.
For example, suppose you notice 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 in their financial performance about debt-to-equity (D/E) metrics or revenues.
Twelve months, in the grand scheme of things, 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 they help smooth out any seasonal changes to performance, or 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 on the travel industry. If you focus on the quarterly results for a retailer 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 as trailing twelve months, investors should never assume those numbers coincide with the company’s most recent fiscal year.
The company’s annual report (10-k) is usually filed at the company’s fiscal year-end. The numbers listed refer to the last twelve months ending on the last day of the month when the financial statement is dated. 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 are equal when it comes to calculating the TTM. For example, the income statement and the cash flow statement are computed quarterly and represent its current activity.
The balance sheet is typically reported as a twelve-month measure, as the balance sheet is a snapshot of that one moment in time and is calculated 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.
A great example of these calculations is working capital, which comes from items on the balance sheet, and then averaged. But, analysts deduct depreciation from income quarterly, and analysts then look at the last four quarters reported on the income statement.
The simplest way to calculate numbers from the trailing twelve months is to add 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 go back and 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, then add the reports for any quarters following the annual report, then 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 take a spin 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 2020, we look at the quarterly report which ended 10-30-2020
- The 10-k report which ended 12-31-2019
- The first nine months of 2019, which ended 10-25-2019
Now, if we access those documents, we get the following numbers:
|2019 Q3||2019 10-k||2020 Q3|
|Page 4||Page 38||Page 4|
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 = $11,588 – $8,320 + $14,109 = $17,377
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 10-30-2020 and divide them by the TTM net income.
TTM EPS = Net Income TTM / Shares Outstanding
TTM EPS = $17,377 / 509 = $34.14
The above is a great example of calculating TTM and how it is best to go about finding the latest numbers for our use of analysis.
There are numerous formulations of the calculations to find the data, but I have found it is best to access the least amount of documents, reducing the opportunity for me to screw up!
The bottom line, use whatever configuration 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 that might occur, 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:
|Free Cash Flow|
|Margins, i.e., gross, operating, and net|
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 impacts or the non-recurring impacts and get a better view of 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
Now, 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 EPS, but instead, EPS grew but not as much as earnings.
When analyzing financials, all publicly traded companies’ financial results are only released quarterly per the SEC and GAAP (generally accepted accounting principles).
These filings are submitted approximately 30 days after the end of a financial period, depending on the scheduling of each document’s release.
The reporting of trailing-twelve month metrics or ratios is possible on these financial documents. Still, they are not required as the financials, such as the income statement, are updated every quarter.
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.
Along with using the TTM for single line items, we can build models that calculate these numbers for every line item of the income statement, for example.
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 management 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 the management’s discussion or the 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.
As investors, having access to the latest and greatest information helps us make better decisions. And the use of financial documents such as the income statement should be our first resource. Sometimes, waiting for the next statement is not an option and analyzing a company mid-year means we need to either use outdated info or guess.
A better direction to go is to use the TTM numbers, which you can calculate by using a combination 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.
With that, we will wrap up our discussion on TTM finance and how we calculate our numbers.
As always, thank you for taking the time to read 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,