Measuring business performance is essential for every organization. It helps you track the health of your company and identify potential areas for improvement. In doing so, you need to use a specific metric or formula that accurately reflects your business positioning. Two popular methods that companies use to calculate metrics are LTM and TTM. In this blog post, we will compare TTM vs LTM, their differences, and which formula is best to use for your business.
TTM is the acronym for Trailing Twelve Months, also known as the Rolling Twelve Months or Last Twelve Months. It is a measure that uses the sum of data collected from the last 12 months to compare a company’s performance year-over-year. The TTM calculation is ideal for companies that have significant fluctuations in their revenue, such as seasonal businesses. Using this formula helps eliminate the effects of seasonality and identifies trends in performance. For instance, if your business’s Q4’s revenue was $800,000, then the TTM calculation would use that data point as the starting point for the next twelve months.
On the flip side, we have LTM, which stands for Last Twelve Months. This method measures a company’s financial performance over the most recent 12-month period, ending on the last day of the previous month. LTM is popular in finance and represents the company’s performance over a particular period. It helps investors or analysts to compare a company’s current performance with past years, making LTM the preferred metric for acquisition or merger purposes.
Both TTM and LTM are valuable financial metrics. However, they differ in application, which makes it crucial to verify which formula aligns with your requirement. If you are a start-up or have a business that experiences significant seasonality, TTM measurement will provide more accurate insights into your company’s performance. On the other hand, investors or analysts seeking to acquire or merge a company will find LTM the most useful measurement tool.
Another critical factor to consider is the type of business that you are running. TTM is best suited for businesses with irregular revenue patterns, like those in the tourism industry. This metric is also effective for small businesses that have minimal capital expenditures. In contrast, LTM is more suited to businesses engaged in heavy investment, such as manufacturing industries, because it provides comparability over a fixed period.
Conclusion:
Determining the right business metrics to use is crucial for measuring business performance. That’s why you need to choose the correct formula to accurately reflect your business performance. If you are running a small business or experiencing significant seasonal fluctuations, TTM is the ideal option. However, if you’re an investor or analyst seeking to make crucial decisions about acquiring or merging a company, LTM’s use is a must. Regardless of the method you choose, your decision should depend on the type of business you’re running and its specific needs.
