How to use TTM for smarter investment decisions?

Investing in the stock market requires a clear understanding of a company's financial health. One effective way to assess this is by examining its Trailing Twelve Months (TTM) data. Understanding the meaning of TTM reveals its function - to deliver a comprehensive view of a company's recent twelve-month performance, which empowers informed investment decisions.

What is TTM?

TTM is a crucial metric that investors and analysts use to evaluate a company's performance over the last year. Instead of relying solely on annual reports, TTM provides a more dynamic view by incorporating data from the most recent twelve consecutive months. This approach allows for seasonal variations to be accounted for, giving stakeholders a clearer understanding of a company’s ongoing performance trends.

For instance, if a company is in a seasonal industry, metrics like revenue or net income might fluctuate significantly at different times of the year. Using TTM figures helps smooth out these variations and provides a more accurate assessment of the company's financial health. TTM can encompass various financial metrics, including revenue, Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA), and net profit.

Moreover, since TTM data does not need to coincide with a fiscal year, it can offer insights into a company’s performance in real time, which is invaluable for making timely investment decisions. Investors often use TTM data to compare the company's performance against industry peers or historical performance, allowing for a more informed investment strategy.

What is the importance of TTM in the share market?

TTM in the share market is crucial because it offers the most recent data, reflecting a company's current performance. Traditional annual reports might contain outdated information, but TTM figures ensure that investors have access to up-to-date data, enabling more accurate assessments.

How are financial metrics analysed using TTM?

Several financial metrics utilise TTM to provide insights into a company's performance, allowing investors and analysts to evaluate trends over a consistent period. This approach smooths out seasonal fluctuations and offers a clearer picture of how the company is performing over the long term. Common metrics that leverage TTM data include:

1. TTM revenue: This represents the total revenue generated over the past twelve months. It helps investors understand the company's sales trends and growth trajectory.
2. TTM Earnings Per Share (EPS): EPS indicates the company's profitability per share over the TTM. A consistent or growing TTM EPS can signal financial health.
3. TTM Price-to-Earnings (P/E) ratio: This ratio compares the current share price to the TTM EPS, helping investors evaluate if a stock is overvalued or undervalued.
4. TTM dividend yield: This metric shows the dividend income relative to the share price over the past year, assisting investors in understanding the return on investment from dividends.

How are TTM figures calculated?

Calculating TTM figures involves summing up the relevant data from the most recent four quarters. For example, to determine TTM revenue:

Add the revenue from the last four quarters:

TTM revenue = Q1 revenue + Q2 revenue + Q3 revenue + Q4 revenue

This method ensures that the data reflects the company's performance over the latest twelve month period, providing a timely and accurate financial picture.

What are the benefits of using TTM in investment decisions?

1. Current performance assessment: TTM provides a real-time view of a company's financial health, which is essential for making informed investment decisions.
2. Seasonal adjustment: TTM accounts for seasonal variations by covering an entire year, offering a more balanced view of performance.
3. Comparative analysis: Investors can compare TTM figures across companies, even if their fiscal years differ, ensuring consistency in evaluations.
4. Trend analysis: Monitoring TTM data over multiple periods helps identify trends, such as consistent growth or decline, aiding in forecasting future performance.

What are the limitations of TTM?

While TTM is a valuable tool, it's essential to be aware of its limitations:

• Backward-looking: TTM reflects past performance and may not account for recent developments or future prospects.
• Non-standardised reporting: Companies may report financials differently, leading to inconsistencies in TTM calculations.
• Potential for misleading data: One-time events or anomalies in a single quarter can skew TTM figures, leading to inaccurate assessments.

How is TTM applied in the Indian stock market?

When investing in the stock market, TTM is widely used to evaluate companies' financial health. Investors often rely on TTM metrics to assess profitability, growth, and valuation. A company that has a lower TTM P/E ratio than its competitors may be undervalued, indicating a possible investment opportunity.

How does TTM help long-term investors?

Long-term investors focus on consistent performance rather than short-term fluctuations. TTM data plays a vital role in identifying companies with strong and stable growth over time. By tracking TTM revenue, EPS, and P/E ratios, investors can determine whether a stock has long-term growth potential.

For example, if a company has shown steady growth in TTM earnings for the past few years, it might indicate strong fundamentals. On the other hand, fluctuations in TTM earnings could suggest volatility or instability, which might be a red flag for long-term investors.

Using TTM for short-term trading

Short-term traders, including day and swing traders, may use TTM data to identify trends and price movements. Although short-term trading relies more on technical indicators, TTM figures can still provide valuable insights into a stock’s fundamental strength.

For instance, if a stock has a rising TTM revenue trend while maintaining a low P/E ratio, it could signal that the stock is currently undervalued, making it a good short-term buy. However, traders should use TTM alongside other indicators such as volume, momentum, and moving averages to maximise effectiveness.

Practical steps to incorporate TTM in your investment strategy

1. Access reliable data: Utilise reputable financial platforms to obtain accurate TTM figures.
2. Compare with peers: Analyse TTM metrics across companies within the same industry to identify relative performance and valuation.
3. Monitor trends: Review TTM data regularly to spot emerging trends, such as improving profitability or increasing debt levels.
4. Integrate with other analyses: Combine TTM analysis with other financial metrics and qualitative factors to form a holistic investment view.

Understanding and utilising TTM metrics can significantly enhance your investment decisions by providing a current and comprehensive view of a company's financial performance. By incorporating TTM analysis into your strategy, you can make more informed choices, whether you're a long-term investor or a short-term trader.

Incorporating TTM metrics into your financial analysis ensures that your decisions are based on the most up-to-date data, reducing the risk of relying on outdated reports. Start using TTM today to gain better insights into stock performance and strengthen your investment strategy.

Disclaimers

• The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.
• We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.
• We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
• We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.
• We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.