If you are an investor looking to put your money into a business, your number one concern will be the value of the business and its potential to generate the revenue you hope to get from your investment.
There are many ways of determining the health of a business. Among the most effective is looking into a business’s performance in the past by using a formula known as the trailing twelve months (TTM) formula. If TTM is a new concept, worry not as, this guide will explain what it is and how it works.
What Is TTM
To Understand the TTM formula, it’s best to start with understanding trailing twelve months (TTM) as a concept. Trailing twelve months is a term used to describe a business’s financial performance over the last twelve months or one year.
Unlike a business’s annual report, TTM doesn’t focus on the performance of a business over one fiscal year. Instead, it looks at the yearly data of a business on a rolling basis. In other words, twelve months before that date in question.
For example, if you wanted to know how a business performed in June of 2023, the TTM formula would look at its performance from June 2022 to May 2023.
TTM Formula
The previous section handled the definition of TTM as a concept; it follows that the TTM formula is applied to get the company’s actual performance and generate what is known as a T21 report. The basic formula for calculating TTM is pretty straightforward. You only need to gather the relevant financial data you want to calculate for the 12 months and add it up.
For example, to calculate revenue TTM, you must get the company’s revenue figures for the 12 months and add them together. The same applies to other metrics such as profits, earnings per share, and debt-to-equity ratio.
However, as more data for businesses becomes increasingly accessible, the need to calculate TTM for more metrics becomes increasingly essential. This calls for investing in tools that can help make creating a T12 report much more accessible and eliminate the chances of error.
TTM Limitations
The TTM formula is a powerful tool for investors and business people, yet it also carries some drawbacks. For example, when significant changes have occurred in the twelve-month time frame used in the equation to compute metrics such as return on equity or EBITDA margin, you may risk getting the wrong impression of the business’s performance.
To supplement this method, you could also explore more options for financial data analysis of long-term trends, such as financial history spanning several years from your date of interest.
Situations Where TTM May Not Be the Best Option
Your accountants probably make quarterly, semi-annual, or annual financial reports if a business is not automated. Under such circumstances, calculating TTM can be highly tasking as it may not align with your accountant’s reporting schedule.
Under such circumstances, you may need to depend on the most recent report to make an estimate. For example, if your finance department makes quarterly reports, you may have to work with the available quarterly reports, which may not yield an accurate T12 report since you would have to leave some months out.
It is also important to consider incorporating technology to calculate TTM and be at par with your competitors that may have already incorporated it for increased efficiency.
Other Metrics to Consider
The TTM formula may not be sufficient to tell the whole story because of its limitations. You may want to consider other metrics outside the T12 report when making financial decisions, such as putting money into an investment. Some metrics you may want to consider are moving average, forward twelve months, and weighted average.
Moving average involves smoothing out the fluctuations in the months leading up to the date in question, which can also be defined as the monthly average. To have the most updated moving average, you must calculate every month while dropping the oldest month in the previous list.
Forward twelve months looks rather than backwards. However, it relies on estimates derived from performance in past months and is calculated through an FT12M formula.
A weighted average is a method used to calculate the average of numbers based on their importance or relevance. It takes into account the fact that some numbers carry more weight than others.
For example, you may consider metrics from the past as more important than those of twelve, eleven, or ten months ago. The weighted average is especially critical in determining the effect an event or a change in the system has on the business.
Final Words
The trailing twelve months (TTM) formula is a powerful tool in helping investors and business people analyze a company’s performance. The points highlighted above are an excellent place to start in understanding TTM and its application in business if you want to apply it.
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