Trailing Twelve Months (TTM) – What It Is & How To Calculate It

Cody Cromwell
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How to Calculate Trailing Twelve Months

(TTM) Depreciation

Have you heard about trailing twelve months (TTM) depreciation? Then if you're a small business owner, you know it is essential to know how to calculate TTM depreciation.

It's important because it enables you to account for the rise and fall of your operating assets over a period of time, so you'll know the most accurate financial history of when items were purchased, what's its value at certain times, and the gain on the sales of those assets.

A trailing twelve-month (TTM) is a method of accounting for depreciation that follows the discounted cash flow methodology. Because it follows a discounted cash flow methodology, it is a bit different than the normal method of accounting by using an initial cost plus and cost of additions, if known method.

To calculate TTM depreciation, you must first determine the asset's effective life. You must also know the asset's salvage value. You can estimate the redemption value, or the current value of the asset, by considering your cash flow. You also have to note that the depreciation for assets used on a lease for the time the asset is used on the lease has to account for the residual value of the asset at the end of the lease.

TTM depreciation is the way to account for the life of a fixed asset. Trailing twelve months uses the first year of an asset's actual use for depreciation purposes.

Income Statement

The income statement is a key step in financial management where managers create statements about a company’s current performance (revenue, cost of revenue and expenses). Earned profits are defined as revenue less expenses. Earned losses are defined as expenses greater than revenue. It can be seen in the income statement that earning profits increases equity and earning losses decreases equity. As a manager, it is important to focus on the creating an income statement that has as positive of a impact on the company’s equity. Income statement’s, like all financial statements, reveal important information to investors and creditors, but they are also valuable for a company’s management because they can give managers a chance to evaluate performance and identify possible reductions in the company’s spending.

Balance Sheet

A balance sheet provides a snapshot of the financial health of a company at a particular point in time, usually at year-end or at the end of a quarter.

While the balance sheet itself is not necessarily a financial statement, it should be considered in conjunction with a company’s income statement, cash flow statement and other financial statements.

Consolidated Balance Sheet:

A consolidated balance sheet is produced when a company has more than one business and how its assets, liabilities, and stockholders’ equity are accounted for are shown as one combined balance sheet for the firm. If a company has several subsidiaries, the consolidated balance sheet will include the assets and liabilities of all business divisions within the parent company.

Long TTM (Trailing Twelve Months):

The long TTM is calculated by rolling the assets and liabilities of a company forward twelve months from their balance date.

What is a Balance Sheet:

Cash Flow Statement

A cash flow statement (CFS) is a financial report that will depict factors of a company’s cash position. It will include current assets, liabilities, and the difference between the two. Generally, a CFS can be submitted at the end of a month, which is known as a trailing twelve months (TTM) cash flow statement.

Let’s use an example to examine what a TTM statement consists of. In this case, say you had 100,000 available cash at various points in time, and now you need to show that change over the last 12 months to any interested party.

In a general way, it’s simple to do, but if you wish to include more than one year’s worth of data, you’ll want to ensure that you have proper number format of numbers presented in columns and rows.

For example, if you were to include the same data for 3 years, you would have 3 separate lines for each year. The first row in the image below presents a general format of the data. Another way to make the data more readable is to include a key of number formats for each year.

Why is TTM Important?

In the insurance industry, TTM is a plan design concept that was first developed in accordance with a written outline by Theo Bradley in 1998. It’s an important part of loss reserve estimation, and it’s now used for all property/casualty line of insurance (P/C) industry financial models, including insurers, reinsurers, cedants and risk managers – and it’s the cornerstone for financial modeling

Throughout the industry.

Here’s what TTM is and how it’s calculated, Specifically:

·It’s a set of rules that reflect how the NAIC expects insurance companies to use and calculate loss reserve estimates. It provides companies with standardized guidelines for calculating both annual and long-term (LT) loss reserves.

·It’s a standard methodology for estimating expected claims frequency and severity, and it’s very important in estimating loss reserves as it assists the company in effectively predicting future claims on a period-to-period basis.

·In addition, TTM helps companies by setting the basis for loss trend analysis and trend development and helps them measure and evaluate the overall effectiveness of loss prevention, claim handling and claims adjustment programs.

Can Eliminate Seasonality

Seasonal factors can greatly affect your results. But have you ever wondered if these effects can be eliminated? A recent innovation called Trailing Twelve Months (TTM) can help with this.

Forecasting using the most recent N-1, or Next-12, months can eliminate seasonality by taking a longer time-horizon and averaging out the inherent seasonality present in shorter time-frames.

Using TTM can help eliminate seasonal effects that can lead to overly pessimistic, or overly optimistic, forecast results. With TTM forecasting, you can get a more accurate overview of the future.

TTM can be thought of as a shift in focus from forecasting the slope of past trends to forecasting the level of those trends. Forecasting level can eliminate seasonality because it takes the effect of seasonality into account.

If you’re interested in whether the economy is having an up year or down year, then you can compare the TTM to the actual results.

Tracks Leading Indicators

MarketOne Partners is a new investment management firm committed to improving outcomes for their clients through research. One of the strategies we use to do this is by following various leading indicators.

Some will be used as indicators of momentum, while others will be used to improve risk-adjusted returns through our long-only core investment style. Through our research and strategy development, we gathered historical data on some key leading indicators. One such indicator, called ‘trailing twelve months’ or ‘TTM’, was presented at a recent webinar.

The purpose of this post is to explain what TTM is, how we use it, and how you can use it as well.

Provides Up-to-Date Financial Information

The trailing twelve months (TTM) financial statement provides information about a company’s total expenses, sales revenue, assets and liabilities, in a specific month. It’s often used in seasonal businesses and industries to measure year-over-year growth and profitability.

While many people think that TTM is simply the past 12 months, TTM actually represents all of the 12 month period prior. So if you’re looking at a company’s TTM from April to December each year, you’re really looking at the financial performance from April to March.

The TTM analysis offers several benefits – it’s much more in-depth than the last two months, and it more accurately reflects a company’s true financial picture. Let’s take a closer look at how you calculate each component of the TTM analysis.

Pros and Cons of Using Trailing Twelve Months

(TTM)

The trailing twelve-month (TTM) method of accounting is an alternative to the current period (CPA) method of accounting because it offers flexibility in forecasting earnings. It is also commonly used by the business world outside the United States.

But, the TTM method has its detractors, as it does have its benefits and drawbacks. The biggest drawback, however, is that the TTM method does not allow investors to calculate the average earnings in the past twelve months (CPA). However, this is a fairly minor flaw, as it offers other flexibility and can be used in many business situations.

There are several uses for the TTM method:

{1}. Forecasting: Because the TTM method does not account for the average cost of goods sold, it can be used to estimate the period that you expect to be profitable.
{2}. Assumptions: The TTM method can be used when making assumptions, such as when you need to make decisions or estimates about your investment.
{3}. Adjusting: The TTM method can be used to adjust your earnings to account for changing costs. For example, if the cost of buying materials went up, the TTM method would allow you to adjust your forecasted income.

How to Calculate Trailing Twelve Months (TTM)

The formula for the trailing twelve months is:

Pros of Using TTM:

TTM is sometimes referred to as the "trailing" or "profit" portion of an income statement.

TTM shows how much profit (or loss) the business made by its last month’s income.

It allows investors to easily see the profitability of a business over an entire year.

It gives investors a current snapshot of how much money was left in the company’s coffers at the start of the fiscal year.

It helps managers prioritize signs and symptoms of the business’s performance that are important to address.

Comparing ongoing profits with last quarter’s profit enables managers to see with what capacity the business was able to generate revenue, and whether or not the revenue generated was enough to cover the business’s expenses. This information helps managers understand how a suitable and timely source of cash is needed.

TTM tells a company’s investors that it is growing and propelling itself forward as it continues to perform well. Financial analysts look at TTM to show their clients how much money investors can expect from that company in the future that will more than make up for the losses made in the past.

Cons of Using TTM:

A few years ago, there was a lot of controversy over using the TTM valuation model for fair valuing a stock.

Why? Because people incorrectly compared the TTM valuation model to the DCF model. The DCF model assumes that the market price is always the correct value, and the difference between the two is used to calculate the excess valuation. The TTM valuation model (which is the long-term average growth rate from prior year earnings) does not work in the same way, but the differences are subtle. Here’s a quick example of how both models differ:

If we assume the fair value of a stock is equal to the stock’s aggregate future cash flow (dividends and earnings), and that the discount rate is equal to the risk-free rate of return, here’s what the valuation equations might look like:

DCF Valuation (In millions) = EBIT (GAAP) + (6% + 20%) * TTM P/E

TTM Valuation (In millions) = EBIT (GAAP) * [1 – (3.5% + 12%) / 3]

Bottom Line

The key here is time, not price. All else being equal, a stock with a longer time horizon in general is likely to get a higher return. What’s not always equal is the liquidity and level of investor activity in the shares. If liquidity and investor attention is higher, even longer time frames may not produce such big returns.

The formula used to determine trailing twelve month returns accounts for the impact of time, and assumes the investor actually has ownership of the underlying security. By not using actual shares as ownership, the trailing twelve month calculation also avoids the impact of dividends (which would be paid out of earnings) and transaction costs.

It’s best to understand how trailing twelve month returns are calculated if you want to customize the calculation in your portfolio manager.

Since more and more investors are relying on index funds, an index fund that simply replicates the TSX 60 Index (i.e. buys all of the stocks in that index) is going to produce the same returns regardless of the time horizon. Because of this, TTM is quickly becoming the more common way to compare returns between investments … even among index funds.

The following is an example of a hypothetical TTM calculation which provides a prospective annual return for a portfolio that has been in the market for four years. This calculation is for illustration purposes only.