Using trailing 12-month (TTM) figures is an effective way to analyze the most recent financial data in an annualized format. Annualized data is important because it helps neutralize the effects of seasonality and dilutes the impact of non-recurring abnormalities in financial results, such as temporary changes in demand, expenses or cash flow. By using TTM, analysts can evaluate the most recent monthly or quarterly data rather than looking at older information that contains full fiscal or calendar year information. TTM charts are less useful for identifying short-term changes and more useful for forecasting.

Companies conducting internal corporate financial planning and analysis have access to detailed and very recent financial data. They use the TTM format to evaluate key performance indicators (KPI), revenue growth, margins, working capital management and other metrics that may vary seasonally or show temporary volatility.

In the context of equity research and valuation, financial results for publicly traded companies are only released on a quarterly basis in securities filings in accordance with generally accepted accounting principles (GAAP). Less frequently, firms provide monthly statements with sales volumes or key performance indicators. Securities and Exchange Commission (SEC) filings generally display financial results on a quarterly or year-to-date basis rather than TTM. To get a clear picture of the last year of performance, analysts and investors often must calculate their own TTM figures from current and prior financial statements. Consider General Electric (GE)’s recent financial results. In Q1 2015, GE generated $29.4 billion in revenue versus $34.2 billion in Q1 2014. GE logged $148.6 billion of sales for the full year of 2014. By subtracting the Q1 2014 figure from the full-year 2014 figure and adding Q1 2015 revenues, you arrive at $143.8 billion in TTM revenue.

Accountants consider work in progress (WIP) to be a current asset because it is a type of inventory asset. Accountants consider inventory assets to be current, because they are reasonably expected to be converted into cash within one year’s time.

Some accountants distinguish between WIP with work in process. Work in process represents the intermediary stage between raw materials and finished goods, while WIP includes the development of long-term (noncurrent) assets. This is atypical, however, and most references to work in progress allude to a stage of inventory asset.

Understanding Current Assets

In financial accounting, current assets include any balance sheet accounts with assets that the company can convert into cash within one year. This conversion needs to be during normal operations; liquidation due to bankruptcy wouldn’t count, for instance.

Common types of current assets on the balance sheet are cash, short-term notes receivable, prepaid expenses and marketable securities. Almost all inventories are considered current assets.

Current assets are contrasted with noncurrent assets, such as long-term notes receivable. Intangible assets are also noncurrent; a business cannot liquidate patents or goodwill.

Work in Progress

It’s easiest to explain work in progress within the context of a manufacturing process. Imagine a warehouse where lumber is used to create tables and chairs. The lumber arrives as raw material, unchanged by the production process inside the warehouse. Over time, pieces of lumber are sized, cut, polished and joined together. These materials are considered WIPs. Once a good is considered ready for sale, it becomes a finished good.

Most production processes take less than one year to complete. A complete finished good can be sold for cash or an account receivable. Consequently, accountants can consider WIP to be a current asset on the balance sheet.

A sunk cost is a cost that cannot be recovered or changed and is independent of any future costs a business may incur. Since decision-making only affects the future course of business, sunk costs should be irrelevant in the decision-making process. Instead, a decision maker should base her strategy on how to proceed with business or investment activities on future costs.

For example, suppose a business executive of a finance consulting company is hired to build a financial analytics application and will receive $10 million at the end of the project. The business executive determines it will cost $7 million in total to finish the project and take one year. The company will profit $3 million for completing this project.

However, in the ninth month of operation, her team runs into problems with the main framework of the application. The firm already spent $5.25 million on this project, and the business executive must decide whether to continue with the project or cancel it. She estimates that this major setback will cost an extra $1 million. However, the company can still profit $2 million from the project.

Whether the business executive decides to continue with the project or cancel it, the costs spent for the nine months of operation cannot be retrieved. This should be irrelevant to her decision because only future costs and potential revenues should be considered. If she cancels the project, the company would incur a $5.25 million loss and have revenues of $0. If she continues with the project, the future revenue for the company is $10 million, and future costs are only $2.75 million.

She decides to continue with the project because it is a 3.64 return on investment, ignoring sunk costs. The consulting company delivers its application to the hirer and receives revenues of $10 million and has a profit of $2 million.

A company performs a reverse stock split to boost its stock price by decreasing the number of shares outstanding, which typically leads to an increase in the price per share.

How a Reverse Split Works

When a company does a reverse split, it cancels its current outstanding stock and distributes new shares to its shareholders in proportion to how many shares they owned before the reverse split. For example, in a one-for-10 reverse split, shareholders would receive 1 share of the company’s new stock for every 10 shares that they owned. If a shareholder owned 1,000 shares before the split, the shareholder would own 100 shares after the reverse stock split.

Why Would A Company Perform A Reverse Split

A reverse split would most likely be performed to prevent a company’s stock from being delisted from an exchange. If a stock price falls below $1, the stock is at risk of being delisted from stock exchanges that have minimum share price rules. Reverse stock splits can increase share prices to avoid delisting, and being listed on a major exchange is important for attracting equity investors.

A split might also be done to boost the company’s image if the stock has fallen dramatically. If the stock is trading in the single digits, it’ll likely be seen as a risky investment particularly if the price is near $1 or considered a penny stock by investors. A reverse split might be engineered by a company to protect it’s brand’s image by trying to prevent the penny stock label. There is a negative stigma typically attached to penny stocks traded only over the counter.

A reverse split sending the stock higher might draw more attention from analysts. Higher-priced stocks attract more attention from market analysts, and if analysts have a favorable view of a company and its stock, it’s great marketing for the company. 

The Effect of a Reverse Stock Split

A reverse stock split has no inherent effect on the company’s value, so the company’s total market capitalization is the same after the reverse split. The company has fewer outstanding shares, but the share price increases in direct proportion to the reverse stock split. The total value of the shares an investor holds remains the same as well. If an investor owned 1,000 shares worth $1 each prior to a one-for-10 reverse stock split, after the split the investor would own 100 shares worth $10 each. The total value of the shares is still $1,000 for the investor. 

Implications of a Reverse Split

Reverse stock splits can carry a negative connotation. As stated earlier, a company is more likely to undergo a reverse stock split because its share price has fallen so low that it’s in danger of being delisted. As a result, investors might believe the company is struggling and that the reverse split is nothing more than an accounting gimmick.

However, a reverse split can be beneficial to a company by boosting its stock price to a level that enables it to transition from being a penny stock traded over the counter to being listed on a major exchange, thereby attracting the interest of more investors.

Financial analysts give their opinions of the future performance of a security. They can give performance ratings of underweight, overweight and market perform to a security. If analysts give a stock an overweight rating, they expect the stock to outperform its industry in the market. Analysts may give a stock an overweight recommendation due to a steady stream of positive news, good earnings and raised guidance.

Analysts will give a stock an overweight recommendation if they feel that the stock’s expected return will be greater than the average return of the industry or market over a given time period. Analysts may also provide a price target when they give a stock an overweight rating.

For example, assume company ABC is in the biotech sector, has a drug for lung cancer and is currently trading at $100. Suppose the company releases positive data and receives FDA approval, and the stock increases by 25%. Analysts may give their opinion based on this news and rate the stock overweight with a price target of $175 for the fiscal year.

Analysts may also give a stock an overweight rating due to positive earnings and raised guidance. For example, assume company DEF, a technology company, releases its quarterly earnings results and beats its EPS and revenue estimates. In addition, the company raises its full-year EPS and revenue guidance by 25%.

The stock increases by 10%, after its earnings release, from $80 to $88 per share. Suppose the sector has been underperforming the market and its stock price decreases by 20% year-to-date while company DEF’s stock price increases 25% year-to-date.

Analysts may give the stock an outperform rating with a price target of $150, because they expect returns to outperform the industry since the stock is appreciating while the sector is depreciating.

A student loan deferral lets you postpone making payments on your student loan for a period of time. Your lender may approve your deferral request under a number of circumstances, including but not limited to temporary total disability, public service (e.g., the Peace Corps or the Armed Forces), parental leave (e.g., pregnancy or caring for a newly adopted or newborn child), medical school residency, full-time graduate fellowship, teaching in a designated teacher shortage area, unemployment, and full-time or at least half-time enrollment at an eligible school.

Your credit score reflects whether you are meeting your obligations to your creditors. You might think that since you aren’t making any loan payments during a deferral period, you’re hurting your credit score. This is not the case. Since your lender has chosen to let you not make loan payments, you are holding up your end of the agreement with your lender and deferral will not hurt your credit score.

There are a couple of ways that deferral can indirectly hurt your credit score, however:

By waiting too long to request a deferral Don’t wait until you’ve fallen behind on your payments to request a deferral. As soon as you fall behind by more than 30 days, your lender can report your late payment to the credit bureaus, which can lower your credit score.

By not paying down your loan balance during the deferral period, your credit score might be slightly lower than it otherwise would be since the total amount you owe compared with the amount you originally borrowed affects your credit score, and the less you owe, the better. In addition, if you have an unsubsidized loan, interest will continue to accrue during the deferral period, and this increase in your loan balance could ding your credit score. If your credit score is lower than it otherwise might be because you owe such a large balance on your student loans, it should start creeping up once you start repaying your loan.

In summary, a student loan deferral does not affect your credit score. However, there are situations where your credit score would be better off if you would actually opt to not take a deferral. Everybody’s situation is different and opting for taking a student loan deferral might be an optimal strategy for some but not for others. 

Companies will use reverse/forward stock splits mainly in an attempt to save future administrative costs. A reverse/forward stock split involves two corporate actions: first, the company will perform a reverse stock split, and will immediately follow with a forward stock split. The purpose of doing this is to cash out any investors who have a small amount of shares. If the reverse split was done at one for 100, then any shareholders with less than 100 shares would be cashed out by the company. After cashing out the smaller shareholders, the company performs the forward stock split to bring the shares back to their original position.

The administrative cost savings come mainly in the form of mailings. In particular, money is saved by not having to print and mail proxies and other documents to smaller shareholders. For smaller companies, this can be a cost-effective strategy that can help trim expenses. The downside of doing this type of split is the message the company is projecting to small shareholders – that they don’t matter. This can sometimes be detrimental to brand loyalty and result in negative public relations.

Another major area of potential cost savings from doing a reverse/forward stock split split comes from reduced regulation requirements, should the company have less than 300 shareholders. Sarbanes-Oxley regulations require companies with over 300 shareholders to comply with the increased regulations under the act. If the company is small enough, a reverse/forward stock split could reduce the number of shareholders enough to save the company a significant amount of money. (For additional reading, check out Understanding Stock Splits.)

This question was answered by Joseph Nguyen

Shareholders need financial statements to evaluate their equity investments and help them make informed decisions as to how to vote on corporate matters. When evaluating investments, shareholders are able to glean meaningful data found on financial statements. There are a number of tools shareholders can use to make equity evaluations, and it is important for them to analyze their stocks using a variety of measurements. Available evaluation metrics include profitability ratios, liquidity ratios, debt ratios, efficiency ratios and price ratios.

Profitability ratios are a group of financial metrics utilized to gauge how well a company generates earnings. Return on equity, or ROE, reflects the percentage of shareholders’ equity returned as net income. This tool acts as a metric for profitability by showing the amount of profit companies generate with a shareholder’s investment. Operating profit margin is an important metric for evaluating the efficiency of a company’s financial management.

Price ratios focus specifically on a company’s stock price and its perceived value in the market. The price/earnings, or P/E, ratio is an evaluation metric comparing current share price of a company’s stock with its per-share earnings. Higher P/E values indicate investors expect continued future growth in earnings. The P/E ratio is most helpful when compared to historical P/E values of the same company, those of companies in the same industry or to the market in general. The dividend yield ratio shows the amount in dividends a company pays out yearly in relation to its share price. Essentially, the dividend yield ratio is a measurement for the amount of cash flow received for each dollar invested in an equity.

These and other evaluation measurements can be calculated using the figures on a company’s financial statements. Investors and market analysts depend on financial statements for equity evaluation. Evaluations are done using different measures because there is no single indicator that adequately assesses a company’s financial position and potential growth.

The reason that margin accounts and only margin accounts can be used to short sell stocks has to do with Regulation T, a rule instituted by the Federal Reserve Board. This rule is motivated by the nature of the short sale transaction itself and the potential risks that come with short selling.

Under Regulation T, it is mandatory for short trades that 150% of the value of the position at the time the short is created be held in a margin account. This 150% is comprised of the full value of the short (100%), plus an additional margin requirement of 50% or half the value of the position. (The margin requirement for a long position is also 50%.) For example, if you were to short a stock and the position had a value of $20,000, you would be required to have the $20,000 that came from the short sale plus an additional $10,000, for a total of $30,000, in the account to meet the requirements of Regulation T.

The reason you need to open a margin account to short sell stocks is that shorting is basically selling something you do not own. As the short investor, you are borrowing shares from another investor or a brokerage firm and selling it in the market. This involves risk, as you are required to return the shares at some point in the future, which creates a liability or a debt for you. It is important for you to bear in mind that it’s possible for you to end up owing more money than you initially received in the short sale if the shorted security moves up by a large amount. In such a situation, you may not be financially able to return the shares. Therefore, margin requirements are essentially a form of collateral, which backs the position and reasonably ensures that the shares will be returned in the future.

A margin account also allows your brokerage firm to liquidate your position if the likelihood that you will return what you’ve borrowed diminishes. This is part of the agreement that is signed when the margin account is created. From the broker’s perspective, this increases the likelihood that you will return the shares before losses become too large and you become unable to return the shares. Cash accounts are not allowed to be liquidated – if short trading were allowed in these accounts, it would add even more risk to the short selling transaction for the lender of the shares. For further reading, see our Short Selling Tutorialand our Margin Trading Tutorial.

Accumulated depreciation is increased with a credit entry, although it is shown on the asset side of the balance sheet. Following the accounting equation, which is the basis for a balance sheet, assets must always be equal to liabilities plus equity.

Assets, on the left side of the equation, are increased with debits and decreased with credits. Liabilities and equity accounts are increased with credits and decreased with debits. However, accumulated depreciation is a special account on the asset side of the balance sheet, which is increased with a credit and decreased with a debit. This is because the accumulated depreciation account is essentially a substitute for decreasing the cost of assets as they lose value over time. In other words, instead of crediting the equipment account directly for depreciation, the depreciable assets account is maintained at the asset’s original cost, and depreciation to the asset is recorded by increasing credit balance of the accumulated depreciation account.

Accumulated depreciation is maintained in a separate account rather than being recorded to the asset account directly. This separates changes in the asset value due to depreciation from changes in the asset account value, which in turn are due to actually disposing assets. For example, if a company had $1 million of fully depreciated machinery, the net asset value would be $0. Rather than show on the balance sheet that the company had $0 of machinery on hand, use of the accumulated depreciation account allows the financial statement to show that the company has a significant amount of machinery on hand, and that the machinery is fully depreciated.

This is informative to financial statement users, because they will now understand that this is a business that might be dependent on this equipment, and they can also guess that this equipment might be reaching the end of its useful life. This is much more informative than simply showing no equipment on the balance sheet once it is fully depreciated.