requiredtovaluefirmsallthroughtheyear.Consequently,the
lastannualreportthatisavailableforafirmbeingvaluedcan
containinformationthatisseveralmonthsold.Inthecaseof
firmsthatarechangingrapidlyovertime,itisdangerousto
basevalueestimatesoninformationthatisthisold.Instead,
usemorerecentinformation.SincefirmsintheUnitedStates
are required to file quarterly reports (10-Qs) with the
SecuritiesandExchangeCommission(SEC)andrevealthese
reportstothepublic,amorerecentestimateofkeyitemsin
thefinancialstatementscanbeobtainedbyaggregatingthe
numbersoverthemostrecentfourquarters.Theestimatesof
revenues and earnings that emerge from this exercise are
called“trailing12-month”revenuesandearningsandcanbe
verydifferentfromthevaluesforthesamevariablesinthe
last annual report.
Thereisapricepaidfortheupdating.Unfortunately,notall
items in the annual report are revealed in the quarterly
reports.Wehavetoeitherusethenumbersinthelastannual
report(which does lead to inconsistent inputs) or estimate
their valuesat theend of thelast quarter (which leadsto
estimation error). Forexample,firms do not reveal details
about options outstanding (issued to managers and
employees)inquarterlyreports,whereastheydorevealthem
inannualreports.Sinceweneedtovaluetheseoptions,we
canusetheoptionsoutstandingasofthelastannualreportor
assume thattheoptionsoutstandingtodayhavechangedto
reflect changes in the other variables. (For instance, if
revenues have doubled, the options have doubled as well.)
Foryoungerfirms, itiscriticalthatwestay withthemost
updated numbers we can find, even if these numbers are
estimates.Thesefirmsareoftengrowingexponentially,and