Trailing twelve months (TTM), also known as the “last twelve months (LTM),” represents the most recent 12-months of data used for financial reporting. It typically measures past revenue or profits and is an effective way to analyze financial data in an annualized format. This shouldn’t be confused with a calendar or fiscal year.
For example, a financial analyst making a report on October 20, 2017, will report the trailing twelve months from October 1, 2016, to September 30, 2017. By using TTM for reporting, analysts evaluate the most recent data rather than older information from the past fiscal or calendar year.
How to Calculate Trailing Twelve Months
Trailing twelve months (TTM) can be used to analyze financial data from balance sheets, income statements, and statements of cash flows. Different methods are used to calculate TTM depending on which financial report you source the data from.
Typically, TTM is calculated using the following approaches:
Income Statement
For income statements that report monthly, simply add up the values of your revenue, expenses, and profits for each month over the last 12 months. However, income statements can also report on a quarterly or on a semi-annual basis. For quarterly reporting, simply take the last 4 quarterly values and add them together. For a semi-annual basis, sum the values from the last two periods to get the trailing twelve months.
Balance Sheet
The balance sheet is a “snapshot in time” of your assets, liabilities, and shareholder’s equity and is typically compared to the balance sheet data from one year ago. For this reason, when calculating trailing twelve months, 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.
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 but also includes changes to the balance sheet over the last 12 months. Ultimately, TTM is calculated the same way as the income statement, adding together monthly, quarterly, or semi-annual figures to get the last 12 months of data.
Why is TTM Important?
Trailing twelve months (TTM) is important because it provides companies with detailed and 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.
The use of TTM is also important because financial professionals like analysts and lenders often perform valuation and credit analysis 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.
For example, there are companies that can grow significantly within a year while other businesses can trend down because of volatility. The use of trailing twelve months as a method of evaluating a company’s financial health and progress will help both internal and external stakeholders assess the most current and accurate value of a company.
Below are three reasons why using trailing twelve months analysis is recommended:
1. Can Eliminate Seasonality
Using TTM analysis eliminates seasonal fluctuations in the business that occur every year because it looks at trends for a longer period of time. Financial analysis using trailing twelve months provides a more accurate picture of a business’s economic health because it looks at the most recent data but does so over a longer period of time than monthly or quarterly.
2. Tracks Leading Indicators
Trailing twelve months shows trends that help you quickly track leading indicators – such as total income, gross profit, and net income. This will help you become aware of any growth and/or decline from your most recent 12 months. 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 pulling trailing twelve-month reports can tedious to do manually, but accounting software like Quickbooks make it much easier.
Pros and Cons of Using Trailing Twelve Months
Business owners, financial analysts, investors, and creditors use the trailing twelve months to assess the financial performance of a business for the most recent 12 months. Of course, the use of trailing twelve months (TTM) method has its benefits and downside.
Pros of Using TTM:
- Trailing twelve months shows the most current 12-month financial performance of a business.
- TTM helps investors and creditors accurately evaluate and value a company.
- The use of TTM can help business owners make strategic decisions that drive company performance.
Cons of Using TTM:
- Using TTM may be laborsome since you need to work back using monthly, quarterly or semi-annual company reports.
- For companies with a volatile business, the values of their financial data may quickly change and TTM analysis might not be reliable.
Bottom Line
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 whether a business is growing or failing. Trailing twelve months is helpful for business owners, potential investors, creditors, financial analysts, auditors, and more.
