There are a lot of abbreviations and terms used in the stock market that can be confusing for beginners. One term you may have heard is TTM. This stands for "time to maturity" and "trailing twelve months." In this article, we will discuss what TTM means in both cases and how it can be used to make better investment decisions.
What is TTM in the stock context?
Trailing twelve months
The first meaning of TTM is the trailing twelve months. This refers to the twelve months prior to the most recent month. For example, if it is currently June 2019, TTM would refer to the period from July 2018 to June 2019.
This is important because it is a way to measure a company's performance over time. The reason why it is used is that different companies can have different fiscal years where they report financial results. For example, Apple's fiscal year is September 26th, whereas Amazon's is on December 30th.
Comparing performance across the last few quarters is not ideal because it does not consider the possible effects of seasonality that affect important financial results such as earnings.
Therefore, TTM is a more accurate way to compare financial performance across companies because it considers the last 4 quarters of financial results from both companies to compare their most recent performance in a more accurate way.
We will dive deeper into how TTM ratios and financials are calculated below.
Term to maturity
The second meaning of TTM is term to maturity. This is the amount of time until a bond matures. It is the length of time from when the bond is issued until it must be repaid.
This is important because it affects the interest payments that the bondholder will receive. For example, a bond with a term to maturity of five years will have interest payments every year for five years. But a bond with a term to maturity of ten years will have interest payments every year for ten years.
The longer the term to maturity, the higher the interest payments will be. This is because the bond issuer will have to pay more interest to the bondholder for lending them the money for a longer period of time at a set interest rate that can fluctuate positively or negatively throughout this period.
However, the bondholder will also have to wait longer to get their principal loan money back. This means that there is a trade-off between higher interest payments and getting your money back sooner.
How is TTM used?
Now that we know the two meanings of TTM, let's discuss how the first can be used.
As we mentioned before, the trailing twelve months is a way to measure a company's performance over time. This is done by looking at financial ratios such as earnings per share (EPS) or revenue growth.
For example, if a company's EPS was $0.50 in the TTM period of July 2017 to June 2018 and $0.75 in the TTM period of July 2018 to June 2019, this would mean that the company's EPS grew by 50% over that one-year period.
This is useful for investors because it shows whether a company is growing or not. If a company is not growing, it may be a sign that it is not doing well and that you should sell your shares. On the other hand, if a company is growing, it may be a sign that it is doing well and that you should buy or hold onto your shares.
Moreover, TTM is very valuable for comparing companies, particularly those in the same industry or sector. This is because you can directly compare their financial ratios to see which company performs better.
For example, if Company A has an EPS of $0.50 and Company B has an EPS of $0.75, this means that Company B's EPS is 50% higher than Company A's. This would be a sign that Company B is doing better than Company A.
However, it is important to note that you should not only look at one financial ratio when comparing companies. Instead, you should look at multiple financial ratios such as EPS, revenue growth, and net income to get a more holistic picture of which company is doing better.
This is where TTM becomes very useful because you can directly compare companies' financial ratios side by side to see which company is doing better on multiple different measures (more on that later).
TTM ratios used
The most important TTM ratios to know are:
- Earnings per share (EPS)
- Revenue growth
- Operating margin
- Net margin
- Return on equity (ROE)
- Return on assets (ROA)
- Free cash flow per share
- Dividend yield
Each of these ratios measures different aspects of a company's financial performance.
Earnings per share (EPS)
EPS measures how much profit a company made per share of stock over the last twelve months.
Revenue growth measures how much revenue a company generated over the last twelve months.
Operating margin measures the percentage of a company's revenue profit after all expenses were paid.
Net margin measures the percentage of a company's revenue profit after all taxes were paid.
Return on equity (ROE)
The Return on equity measures how much profit a company generated with the money that shareholders invested.
Return on assets (ROA)
This metric measures how much profit a company generated with the money that it had available to invest.
Free cash flow per share
Free cash flow per share measures how much cash a company has left over after all expenses were paid.
ROIC measures how efficiently a company is using its capital to generate profits.
Dividend yield measures how much dividend income a shareholder would receive if they owned one share of the company's stock.
As you can see, each ratio measures something different. This is why it is important to look at all of them when you are trying to understand a company's financial performance.
TTM calculation for financial statements
In addition to looking at financial ratios, you can also use TTM to measure a company's financial statements. This includes the balance sheet, income statement, and cash flow statement (see the guide on how to analyze each financial statement). Let's explore how TTM numbers are calculated for each financial statement.
The income statement financial items are straightforward to turn into TTM values. All you have to do is sum the last 4 quarters of each line item, and you have the TTM value.
For example, if a company's quarterly revenue numbers for the last four quarters are $100,000, $120,000, $130,000, and $140,000 then the company's TTM revenue would be $100,000 + $120,000 + $130,000 + $140,000 = $490,000.
As you can see, calculating TTM values for the income statement is very simple and straightforward.
The balance sheet is slightly different because you cannot just add the last 4 quarters to get the TTM values. This is the case because the balance represents a financial position snapshot of a company at a particular period of time.
Don't worry, though. Getting the TTM values is very simple all you have to do is take the values from the last quarter. This is the most accurate way to calculate these numbers because the last quarter represents the most recent financial snapshot of the company, which is what TTM is used to represent.
Cash flow Statement
The cash flow statement calculation is the same as the income statement, where you need to add the last four quarters of financial results. The key difference is that the cash flow statement measures cash inflows and outflows instead of profit.
For example, if a company's quarterly free cash flow numbers for the last four quarters are $100,000, $120,000, $130,000, and $140,000 then the company's TTM free cash flow would be $100,000 + $120,000 + $130,000 + $140,000 = $490,000.
How to calculate TTM ratios for a particular company
There are two ways to calculate TTM ratios. The first way is to look up the company's financial statements on their website and calculate them manually using their specific formulas. The problem with this approach is that it quickly becomes overwhelming when you look at many companies at once.
Thus the second and more efficient way is to use a service or site that already calculates these metrics for you. For this option, you can visit a site like Yahoo Finance which includes many of these metrics already available and calculated.
However, for analyzing these metrics across multiple companies, which is where most of the value is realized, this method is very time-consuming and ineffective since you have to constantly look for the numbers and copy-paste them on a spreadsheet for every company you analyze.
Therefore you should highly consider using a service like Wisesheets, which provides you with all these ratios, financials, and more in a TTM format so you can quickly get the data you need and find better investment opportunities.
Interpretation of TTM ratios based on certain factors
When looking at TTM ratios, it is important to compare them to other companies in the same industry. This is because different industries have different average TTM ratios.
For example, a company in the tech industry will have a higher P/E ratio than a utility company because investors are willing to pay more for future growth potential in the tech industry.
It is also important to compare TTM ratios across different time periods for the same company. This is because a company's TTM ratios can change over time as the company's financial situation changes.
For example, a company that is growing rapidly will have higher TTM ratios than a company that is stagnant or declining.
Finally, it is important to remember that TTM ratios are just one tool that you can use to analyze a company. Therefore, it is important to look at all aspects of a company before making an investment decision.
Comparison of different companies' TTM ratios to find undervalued or overvalued stocks
Now that we know how to calculate and interpret TTM ratios, let's put this knowledge to use. We will compare the TTM ratios of 5 different companies in the same industry to see if one is undervalued or overvalued.
As you can see, Intel has ROIC, ROE and EPS ratios and is trading at only 7 times its earnings. Therefore based on these numbers, we can see that Intel may be undervalued.
This doesn't mean that you should automatically invest in Intel, though. You should always do your own research before making any investment decisions and consider other additional factors that may be causing this drop in value.
I hope this article helped you to better understand the meanings of TTM, how TTM numbers and ratios are calculated, and how to use them in your stock analysis.
Overall, TTM ratios can be very useful in finding undervalued or overvalued stocks. However, it is important to remember that ttm ratios are just one tool that you can use in your stock analysis. There are many other factors that you should consider before making any investment decisions.
Do you have any questions or comments about TTM ratios? Leave a comment below.