What it means
Companies report results by quarter and by financial year, but a financial year can end months ago. A trailing figure rolls the window forward each period so that it always covers the latest stretch of time.
A trailing twelve months, often shortened to TTM, adds the most recent four quarters whatever the calendar. This is useful because it smooths seasonality.
A retailer earns much of its profit in the holiday quarter, so comparing one quarter with the previous one can mislead. A full year of trailing data contains every season once, so the comparison is fair.
The same idea applies to returns and ratios. Trailing returns show how an investment performed over the past one, three or five years ending today, and trailing price-to-earnings ratios use the last twelve months of profit.
In each case the number describes the past and does not promise anything about the future. The second common use is the trailing stop, which is an order that follows the price at a fixed distance or percentage.
If a share is bought at $100 with a 10% trailing stop, the stop sits at $90, and as the price rises to $120 the stop moves up to $108. If the price falls to the stop level, the position is sold, locking in part of the gain.
The nuance is that trailing measures lag. They are slow to reflect a sudden change, such as a new contract, a lost customer or an acquisition, and they can include one-off items that make the period unrepresentative.
Analysts often adjust trailing figures for unusual items. When reading a report, check what period is meant and whether the figure is adjusted.
A trailing measure is a sensible starting point for analysis, but should be combined with forward-looking information such as budgets, orders and pipeline.
In practice
Real-world examples.
Example
An investor in a restaurant chain looks at trailing twelve months revenue because the chain's calendar year ended six months ago. The TTM figure shows sales have climbed 9% since the last annual report. The investor uses it to update her valuation.
Example
A bank covenant requires a company to keep debt below three times trailing twelve months earnings. The CFO recalculates the ratio every quarter as new results arrive. The ratio is reported to the lender with a compliance certificate.
Example
A trader buys a share at $50 and sets an 8% trailing stop. As the price climbs to $65, the stop rises to $59.80. When the price reverses and touches that level, the position is sold at a profit.
Formula
Calculation
Trailing twelve months (TTM) = sum of the latest four quarters
Suppose a company reports quarterly revenue of $2,000,000, $2,200,000, $2,400,000 and $2,600,000 for the last four quarters. TTM revenue = 2,000,000 + 2,200,000 + 2,400,000 + 2,600,000 = $9,200,000. When the next quarter arrives at $2,800,000, the oldest quarter drops out and the new TTM = 2,200,000 + 2,400,000 + 2,600,000 + 2,800,000 = $10,000,000.Case study
Seen in the real world.
Harrowgate Garden Supplies is a fictional retailer, and this case is illustrative only. Its profit is highly seasonal, with most income in spring. An analyst comparing its latest quarter, which was weak, with the previous strong one concluded that the business was in decline.
A colleague rebuilt the analysis using trailing twelve months, which showed profit up 6% on the year before. In this illustrative story, the analyst corrected the report before it reached clients. The lesson is that trailing measures remove the distortion caused by seasonal patterns.
The firm now shows TTM revenue and TTM operating profit on the first page of its monthly management report. Each month, the finance team also lists any one-off items that have entered or left the twelve-month window, so readers can see why the figure moved.
Watch out
Common mistakes.
- Treating a trailing figure as a forecast. It describes the past and may not repeat.
- Forgetting to adjust for one-off items. A large gain or write-off in the period can distort the trailing total.
- Setting a trailing stop too tight. A small distance can trigger a sale on ordinary price swings.
Questions
People also ask.
What does TTM stand for?
It stands for trailing twelve months, meaning the latest twelve months of results regardless of the financial year end. Some analysts write LTM, for last twelve months, which means the same thing.
Why not just use the annual report?
The annual report may be several months old, while trailing figures include the newest quarters.
How does a trailing stop differ from a normal stop-loss?
A normal stop stays at a fixed price, whereas a trailing stop moves up as the price rises and stays put when it falls.
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