What do all those letters stand for?

What do all those letters stand for?

We have members of this board with all different levels of investing experience, and from some recent questions, we have some members who are just starting out, and some with more experience, but for whom all the terms that are used may not be familiar. To help you out, if you are one of these people, I thought I’d give some definitions. Let’s begin:

TTM or ttm (sometimes it’s in caps, sometimes in small letters). This means “trailing twelve months” and refers to the previous four quarters that have been reported. If the reference is to TTM earnings and the last quarter reported was Dec 2014, that’s easy. It refers to the sum of the March, June, Sept, and Dec 2014 earnings. But what if they have already reported Mar 2015 earnings? Then you use the sum of June, Sept, and Dec 2014, and Mar 2015, earnings, but you drop off Mar 2014 (which would be a fifth quarter).

GAAP is short for Generally Accepted Accounting Principles and refers to a set of fixed required accounting rules. These were created to avoid cheating on quarterly reports, but for all the good intentions, they unfortunately sometimes give bizarre and nonsensical results. For this reason, in addition to the GAAP results which they are forced to give, most companies give:

Adjusted or non-GAAP results, which they feel (and I agree) give more consistent and more helpful results in allowing you to see how the company is doing from quarter to quarter. They are usually obtained by removing various non-cash expenses or gains, or extraordinary one-time gains or losses that don’t reflect how the underlying business is doing. (These can also be abused, but in my opinion are almost always preferable to GAAP).

YoY or yoy is short for Year-over-Year. Okay, but what does that mean? Well, for example, if you say March quarter results were up by 12% year-over-year, that means compared to March results a year ago. This is contrasted to sequentially.

Sequentially, which refers to the quarter just before. Thus, if you say March quarter results were up by 12% sequentially, that means compared to the December results, the quarter just before. Investors like to see earnings and revenues going up sequentially as well as yoy, but sometimes it isn’t possible because you also have to take seasonality into account.

Seasonality? What the heck is seasonality? Think Christmas. If you are a major retail store a large part of your years results will come during the December quarter. But if you are a manufacturer, your big quarter is likely to come in the quarter before, the September quarter, when you are shipping out to the stores who are stocking up for Christmas. And some businesses renew a lot of contracts in December and get a lot of business then, or get orders when other companies are closing their books for the year in December. Companies that do business in China are light in the first quarter because of the Chinese New Year. Those who do business in Europe may be light in the Sept quarter because every one is on vacation in August in Europe, outdoor construction companies will do less business in the middle of winter, etc, etc.

The PE ratio or PE. This is the Price of the Stock divided by the earnings over the past year (These are the trailing-twelve-month earnings, or TTM earnings). It tells you how many times bigger the price is than the earnings. Lower is better. For example, right now Skechers has a price of $91.70 and adjusted earnings of $3.52, so it’s PE is 91.70 divided by 3.52, which gives a PE of 26. That means the price is 26 times the earnings, or that the earnings are just about 4% of the price. Generally a faster growing company will get a higher PE because the price is bid up by investors anticipating future higher earnings. Also, a company with a lot of hype will often get a higher PE, again because investors bid the price up based on dreams. (For example, last time I looked, Under Armor had a PE of about 90 or so, which is huge, although it was growing at a quarter of the pace of Skechers).

PEG ratio. This is an attempt to see if the PE is appropriate by comparing it to the rate of growth, (PE divided by the estimated rate of yearly growth of earnings over the next five years). It’s a noble effort, except that guessing the rate of growth of earnings over the next five years has no more accuracy than estimating how many angels can dance on the head of a pin. To avoid this problem, I introduced the 1YPEG.

1YPEG, or One year PEG. This is the PEG looking back over the past year: the PE divided by the rate of growth of earnings over the most recent twelve months. It has the disadvantage of looking backward, but has the advantage of using a real number, not a guess, for the growth rate. And the rate of growth over the next year will probably approximate the rate of growth over the past year, more than some five-year guess.

TTM Rate of growth of Earnings is calculated by taking the earnings of the last four reported quarters, and seeing how much they have risen over the four quarters previous. For example, you’d get it by taking the sum of June, Sept, and Dec 2014, and Mar 2015, earnings, and divide it by the sum of the sum of June, Sept, and Dec 2013, and Mar 2014, earnings.


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Thanks and thanks again


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Thank you, I was having a hard time with trailing twelve months.

Thank you Saul, very helpful.


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