Trailing twelve months (TTM) refers to a company’s past 12 consecutive months of performance data used in financial reporting. Businesses use trailing twelve months as an effective method to analyze financial data in an annualized format. However, TTM does not necessarily coincide with the ending of a calendar year or a company’s fiscal year.
Using TTM figures is helpful because it allows you to evaluate the most recent annualized numbers, reducing the effects of seasonality. With TTM, you can view a full year of up-to-date financials at any time of the year. For example, if you are using TTM to make a report on August 10, 2021, you will use the financial data from August 1, 2020, to July 31, 2021.
How to Calculate Trailing Twelve Months
Trailing twelve months can be used to analyze financial data from balance sheets, income statements, and cash flow statements. Analysts use different methods to calculate TTM depending on which financial report the data is sourced from.
TTM is typically calculated using the following approaches.
Using Income Statement
Companies report their income statements on a monthly, quarterly, or annual basis. The process for generating a trailing twelve months figure for each item in the income statement will depend on the available reports.
For income statements that report monthly, simply add the values of your revenue, expenses, and profits for each month during the last 12 months, using the following formula:
TTM figure = month 1 + month 2 + month 3 + month 4 + month 5 + month 6 + month 7 + month 8 + month 9 + month 10 + month 11 + month 12
Where “month 1” represents the most recent month from the time of reporting, work backward every month until you complete the 12 months. For quarterly reporting, take the last four quarterly values and add them together, as follows:
TTM figure = most recent quarter + 1 quarter ago + 2 quarters ago + 3 quarters ago
There is an alternative method to calculate TTM for income statements. If your latest quarterly report was for Q1 of the current year, you can add those figures to the last full year’s figures from the annual report, then subtract the previous year’s Q1 figures.
TTM figure = Q1 of the current year + last full year – Q1 of last year
If the company just released an annual report, the TTM figures are the same as the ones shown in the company’s annual income statement.
Using Cash Flow Statement
The cash flow statement is a running total of your company’s operating, investing, and financing cash flows. It’s similar to the income statement and includes changes to the balance sheet over the last 12 months. Ultimately, you can calculate TTM the same way as the income statement, adding monthly or quarterly figures to get the previous 12 months of data.
You can also add the figure for the reporting period to the figure in the recent annual report and take off the figure for the previous year’s matching period. For example, figures from Q1 of 2021 plus the annual numbers from 2020 less the figures from Q1 of 2020 will give you the trailing twelve months data from April 1, 2020, to March 31, 2021.
Using Balance Sheet
The trailing twelve months method does not affect the balance sheet because it only reflects a single point in time of your assets, liabilities, and shareholder’s equity. A balance sheet is typically compared to the balance sheet data from one year ago. When calculating trailing twelve months for balance sheets, all you have to do is use the most recent period’s numbers. These numbers will represent the last twelve months of balance sheet data.
Why Is TTM Important?
The trailing twelve months method is essential because it provides companies with detailed, recent financial data for internal audits, financial analysis, and corporate planning. TTM is useful for evaluating revenue growth, margins, sales and expense trends, working capital management, key performance indicators (KPIs), and other financial metrics.
Financial professionals like analysts and lenders often perform valuation and credit analyses of companies throughout the year using TTM. When conducting this valuation and analysis, reliance on year-end or calendar year financial data will not provide an accurate picture of the company’s current financial health—TTM will be more helpful.
Some companies can grow significantly within a year, while other businesses can trend down because of volatility. The use of trailing twelve months to evaluate a company’s financial health and progress will help both internal and external stakeholders assess the most current and accurate value of a company.
Here are three reasons why using trailing twelve months analysis is recommended.
1. Eliminates Seasonality
Using TTM analysis eliminates seasonal fluctuations in the business that occur every year because it looks at trends for a more extended period. Financial analysis using trailing twelve months provides a more accurate picture of a business’s economic health because it reviews the most recent data over a longer period than monthly or quarterly.
2. Tracks Leading Indicators
Trailing twelve months shows trends that can help you quickly track leading indicators, including total income, gross profit, and net income, showing any growth or decline from your most recent 12 months of performance. With this, you can make strategic business planning and wiser decisions that drive sales, improve performance, and achieve other business goals.
3. Provides Up-to-Date Financial Information
A company that wants to evaluate its economic performance doesn’t need to wait until year-end to know its current financial position. TTM provides the most up-to-date information on the financial health of the business. While manually pulling trailing twelve months reports can be tedious, accounting software like QuickBooks makes it more accessible.
Pros and Cons of Using Trailing Twelve Months
|Shows the most recent 12-month financial performance of a business||Can be tedious to do since you need to work back using monthly or quarterly company reports|
|Helps investors and creditors evaluate and value a company more accurately||For companies with a volatile business, the values of their financial data may quickly change, and TTM analysis might not be very reliable|
|Helps business owners make strategic decisions that drive company performance|
Using trailing twelve months gives a business insights into its recent performance and current financial health. It also shows trends that can help external stakeholders determine the growth and decline of a business. The data from the trailing twelve months method is more current and seasonally adjusted, which can be helpful for business owners, potential investors, creditors, financial analysts, and auditors that want to see more relevant measures.