Trailing 12 Months (TTM) is used when a particular data from the past twelve successive months is used to evaluate a company’s performance. It is to be noted that TTM period does not represent a fiscal year ending period, it only comprises the past 12 months from the current date.
Considered as the best hedge fund manager of his generation, David Tepper is an American businessman with net worth of USD 12 billion. He is a President and Founder of an US-based fund management company, Appaloosa Management.
An earnings announcement is a public statement of a company’s earnings, usually done on a periodic basis. These official announcements are released quarterly or yearly to inform the investors and the market about a company’s financial performance. Companies announce their financial reports through press releases on their websites and list them on the stock exchanges website. After the information is released through a conference call, there is a question-and-answer round with the senior management in which analysts, media, and investors can participate. On the basis of the report, analysts then incorporate earning measures such as EPS (Earning Per Share). These reports help investors in making sound investment decisions. Earnings results are announced during the earnings season on a date chosen by the company. Stock prices of the companies take a swing before and after the company releases its earnings report. Equity analysts also predict earnings estimates through their analysis which drives stock prices movement due to speculations. Stock prices even move after the earning results are declared, up or down, depending on how the results have turned out. Source: Copyright © 2021 Kalkine Media Pty Ltd. When are earning announcements made? It is mandatory for every listed company to report its quarterly financial results in the US but not in Australia. In Australia, companies release their financial report on a semi-annual basis. Having said that, many Australian companies also update their shareholders quarterly, but these are not considered official earnings. These quarterly reports are released to satisfy the market demand for information and to disclose the company’s guidance on its performance. The financial calendar varies from country to country and therefore, the earnings season changes as well. In the US, the earnings season starts after the final month of the financial quarter. Usually, American companies start posting their earnings reports in January, April, July, and October. In Australia, companies report twice a year, usually around February and August, or May and October. It depends upon the company’s financial cycle. However, whether quarterly in the US or semi-annually in Australia, these earnings results are required as agreed while listing the company with the stock exchanges. Source: Copyright © 2021 Kalkine Media Pty Ltd. Why are earnings announcements necessary? Financial results help investors, media, and other stakeholders of the company to have a greater understanding of the company’s financial footing. Companies not just provide sales, operating profit, net profits, but also offer guidance and outlook for coming months. Additionally, these reports also have senior management statements directed at the market. Therefore, earning announcements act as an informative document for the investors and analysts to study and gauge a company’s performance. Analysts can provide earnings estimates, and investors can then take wise investment decisions. These documents are also vital for companies when it comes to seeking funding for the business. Financial institutions can also judge a company’s financial health by evaluating earnings reports. The management offers insights on growth drivers, risk factors, etc that impacted the earnings during that particular period. Analysts also assess the earnings results, taking into account the external factors that drove the growth or impacted the firm negatively. These factors could be mergers and acquisitions, bankruptcies, economic discrepancies, policy changes, etc. For investors, earnings reports are essential because these announcements swing the price up or down. Traders keep a keen eye on these reports as it can be a time when they can confirm positions. However, some investors also avoid earnings seasons because of the involvement of various human factors.
What is EBITDA? Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) is a widely used financial metric in evaluating cash flows and profitability of a business. Market participants closely track EBITDA and apply it in decision making extensively. Although conventional investors like Charlie Munger had raised concerns over the use of EBITDA, it is very popular in markets, and M&A transactions are mostly priced on EBITDA-based valuation like EV/EBITDA (x). EBITDA is not recognised by IFRS and GAAP but is used extensively in the Corporate Finance world. It is now a mainstream financial metric that companies look to target. EBITDA depicts operational cash generation capacity of a firm in a given period. It acts as an alternative to financial metrics like revenue, profit or earnings per share. EBITDA allows to evaluate a business operationally and outcomes of operating decisions. Non-operating items are excluded to arrive at EBITDA. EBITDA excludes the impact of capital structure or debt/equity, and non-cash expenses like depreciation and amortisation. A particular criticism of EBITDA has been the inappropriate outlook of capital intensive businesses, which incur large depreciation expenses. Business with large assets incurs substantial costs related to repair and maintenance, which are not captured in EBITDA because depreciation expenses are accounted to calculate EBITDA. Meanwhile, EBITDA can paint an appropriate picture for asset-light business with lower capital intensity. While revenue, profit and earning per share remain sought-after headline generators for corporates, EBITDA has also found its growing application in the corporate finance world and is now a mainstream metric to evaluate a business financially. Perhaps the growth of asset-light business models has also added to the use of EBITDA. Its debt-agnostic approach to evaluate businesses has given reasons to investors, especially for high growth firms during capital expenditure cycles. But EBITDA has been present for close to four decades now. In the 1980s, the growth in corporate takeovers through leverage buyout transaction was on a boom. EBITDA grew popular to value heavy industries like broadcasting, telecommunication, utilities. John Malone is credited for coining this term. He was working at TCI- a cable TV provider. Since EBITDA has remained an important metric to determine purchase price multiples and is highly used in M&A transactions. EBITDA’s application in large businesses with capital intensive assets that are written down over a long period has been a source of concern for many investors. Although EBITDA is an effective metric to evaluate the profitability of a firm, it does not reflect actual cash flow picture of a firm during a period. Also, it does not account for capital expenditures of the firm, which are crucial in successfully running a business. EBITDA does not give a fair cash flow position because it leaves out crucial items like working capital, debt and interest repayments, fixed expenses, capital expenditure. At the outset, there can be times when EBITDA may overstate performance, value and ability to repay debt. How to calculate EBITDA? NPAT: Net Profit after tax is the amount reported by a firm in the given period. It is present on the income statement of the firm and is used in the calculation of earnings per share of an entity. To calculate EBITDA, interest expense, tax, depreciation and amortisation are added to NPAT. Interest Expense: Firms can employ debt in their capital structure, and interest expense is funds paid to lenders as interest costs on principal debt. Most companies have different financing structure, and excluding interest payments enable comparing firms on operating grounds through EBITDA. Tax: Firms also pay income tax on profits. Excluding taxes gives a fair picture of the operating performance of the business since tax vary across jurisdictions, and sometimes according to size of business as well. Depreciation: Depreciation is the non-cash expense to account for the steady reduction in value of tangible assets. Firms can incur depreciation expense on machinery, vehicles, office assets, equipment etc. Amortisation: Amortisation is the non-cash expense to account for the reduction in the value of intangible assets like patents, copyrights, export license, import license etc. Operating Profit: Operating profit is the core profit of a firm generated out of operations. It includes cash and non-cash expenses of a firm, excluding income tax and interest expenses. Operating Profit is also called Earnings Before Interest and Tax (EBIT). Read: EBIT vs EBITDA What is TTM EBITDA and NTM EBITDA? Trailing Twelve Months (TTM) or Last Twelve Months (LTM) EBITDA represents the EBITDA of the past twelve months of the firm. It allows to review the last operation performance of the business. Whereas NTM EBITDA represents 12-month forward forecast EBITDA of the firm. NTM EBITDA is also one-year forward EBITDA. Market participants are provided with consensus analysts’ estimates for a firm, which also include NTM EBITDA, NTM EPS, NTM Net Income or NPAT. What is EBITDA margin? EBITDA margin is the percentage proportion of a firm EBITDA against total revenue. It indicates the operational profitability of the firm and cash flows to some extent. If a firm has a higher margin, it means the level of EBITDA against revenue is higher. It is widely used in comparing similar companies and enable to evaluate businesses relatively. If a firm has a total revenue of $1 million and EBITDA is $800k, the EBITDA margin is 80%. What is adjusted EBITDA? Adjusted EBITDA is calculated to provide a fair view business after adding back non-cash items, one-time expenses, unrealised gains and losses, share-based payments, goodwill impairments, asset write-downs etc.
What is market capitalisation? Market capitalisation is one of the ways employed to evaluate the valuation of a company. This aggregate valuation is based on the current market price of the company’s shares and the total number of outstanding stocks. One needs to make the calculation to determine the company valuation. It is primarily outlined by the total market value based on the company’s outstanding shares. This simply means that evaluation by this method can be done only for businesses that are publicly traded. Source: © Djbobus | Megapixl.com Why is it essential for investors? Understanding and calculating market capitalisation of a business are essential, especially for investors, as it guides them make sound investment decisions. A company’s correct value evaluation can help investors choose the right shares to invest in as per their need. However, it is imperative to keep in mind that various internal and external factors can also impact the number, as market capitalisation is based upon the value of the company’s current shares and number of outstanding stocks. The share price of a listed company can move in an upward or downward direction due to multiple factors, such as critical financial announcements made by the company, changes in the management or structure, fluctuations in market conditions, etc. As these factors impact the price of the company’s current shares, the market capitalisation also changes, going up or down with increase or decrease in the numbers. From an investor’s standpoint, evaluating market capitalisation using this method is crucial, especially while charting a long-term investment plan. Additionally, the returns and risks associated while investing in a particular company are also imperative for the investors. Market capitalisation plays an important role in aiding the investors while choosing stocks that meet their criteria while investing in various companies to maintain the portfolio. Meanwhile, it is vital to keep in mind that the market capitalisation demonstrates the stage of a company’s development. Source: © Noamfein | Megapixl.com What are the types of companies based on the market cap? Knowing the formula employed to calculate the market capitalisation can provide clarity to investors. For instance, a particular company has 10 million outstanding shares, and the current market price is $100 per share. In this case, market capitalisation of the company will be 100,00,000 x 100 = 1,000,000,000. The stocks of listed companies fall into three categories based on this popular method of evaluation. Investors usually choose stocks from judging market capitalisation valuation. Usually, investors also decide for balanced investment in different combinations of stocks with different market capitalisation to minimise risk. Stocks of companies with a market capitalisation of $10 million or above fall under the category of large-cap stocks. Companies with a market capitalisation in the range of $2 billion to $10 billion are called mid-cap players or mid-cap stocks. Companies with a market cap of $300 million to $2 billion are called small-cap stocks. Large-cap stocks: Companies with large capitalisation are usually considered stable businesses in the market. Thus, investing in large-cap companies is less risky compared to investing in other stocks. Though these are companies have a significant market cap, the returns they offer are generally on the lower side. It is believed that these companies have reached the highest point of their development by being in the market for many years and providing a stable performance for years. Thus, even with major announcements that could have a significant impact on the share price, investors are unlikely to see any significant change in their share price. Investing in large-cap companies offers minimum risk, and the growth is also less aggressive than emerging companies. Therefore, investment in a large-cap company is considered conservative. Mid-cap stocks: Companies with mid-range market capitalisation are poised for particular growth. These companies are also somehow stable, making them deliver a promise of future growth. Most importantly, they demonstrate that the business is set up in a particular way. Investing in mid-cap companies can be riskier compared to investing in large-cap companies. Though these companies are not fully established like the large-cap companies, these stocks have growth potential. On a positive note, investing in mid-cap companies is less risky than the small-cap ones. Notably, the returns mid-cap companies can offer are usually higher than the large-cap companies, making it attractive for the investors. Small-cap stocks: Investing in companies with small market capitalisation is a precarious step. However, these stocks are lucrative to many investors. Small-cap companies are new in town; they are up-and-coming and not very much established in the industry than the mid-cap and large-cap ones, making them highly risky. However, investors’ risk would be highly paid off if these players find success, as they hold strong potential to grow. Therefore, investing in small-cap stocks can be an aggressive investment option. Source: © Lovelyday12 | Megapixl.com Important aspects of valuation to keep in mind: While evaluating the market capitalisation of a company, investors need to study a few critical areas that could impact investment decisions. Following are the relevant ratios to take into consideration. Price-to-earnings ratio: One of the critical ratios is considered while evaluating any company’s market capitalisation is the price-to-earnings ratio. While buying shares of a particular company, this ratio will help the investors project returns for the future. Detailed discussion at: Price to Earnings Ratio - (P/E Ratio) Price-to-free-cash-flow ratio: This ratio is also utilised to measure the expected returns. Price-to-book value: This ratio is calculated by deducting the total value of liabilities from the total book value of the company's assets. Enterprise-value-to-EBITDA: This ratio helps investors evaluate and measure the operational returns generated in the short term. Free-float market cap: The number of outstanding shares that are kept for investors to trade publicly is called float. This method excludes the shares owned by the company's executives.