LTM vs. NTM Valuation Multiples
Financial analysts use LTM vs. NTM and a number of valuation multiples in looking at corporate deals. In the world of M&A, relative valuation serves as one of the fastest ways of valuing a business. However, it becomes very important to understand the metric being used, as the objective is always to compare the companies with a similar data point to avoid inconsistencies in the result.
LTM stands for Last Twelve Months and TTM stands for Trailing Twelve Months, which is basically the historic or backward-looking multiple. It uses data points like EPS, EBITDA, revenue, etc. of the last twelve months of operation. The reason for using past period data is that it is accurate, and hence more reliable. LTM is generally used for businesses with uniform growth prospects.
However, when the company’s performance depends on its cyclical nature or it is technology savvy, growth prospects differ. In such a case, historical multiples don’t hold true. As a result, NTM, or Next Twelve Months, and other forward multiples makes more sense, as it provides a picture of what the company is planning to achieve.
Example of LTM vs. NTM Valuation Multiples
The captured data for Amazon below shows how the performance of its EPS changes from 80.4% last year to expected performance of 85.7% in NTM. A similar forecast can be seen for the company’s revenue.
The multiples below show how the difference between the multiples can be based on historical and future projections. Below is the LTM and NTM multiples of Amazon.
|FORECAST MULTIPLES (MEAN)|
|Return on Assets||2.83||4.41|
|Return on Equity||12.91||18.2|
|Return on Invested Capital||11.69||17.22|
Analysis of Valuation Multiples
This is one of the most popular multiples used across industries, as it is difficult to manipulate the revenue numbers. The EV/Revenue multiple becomes relevant, especially when a company reports a negative EBITDA, as the multiple EV/EBITDA will not be relevant. Start-up companies in the e-commerce sector will generally report a negative EBITDA in their initial years. Thus, EV/Revenue is a poor measure, as two companies with the same revenue can show a large difference in the way it is operated, which reflects in their EBITDA.
EBIT (also called Operating Income) is derived after the adjustment of depreciation and amortization, as it reflects real expenses and considers wear and tear of a firm’s assets that need to be replaced by the company. In the case of non-capital intensive companies, such as consulting or technology companies, EBITDA and EBIT are somewhat close, and hence multiples like EV/EBITDA and EV/EBIT are similar.
This is not one of the very popular ways to calculate multiples but is still used by capital-intensive companies. The invested capital determines the potential earnings, however, it doesn’t take into account differences in profitability. Learn more about calculating the Return on Capital Employed (ROCE).
The P/E multiple takes into consideration the price in the numerator and earnings per share in the denominator. It is similar to equity value to net income, wherein they are divided by fully diluted shares.
The PEG ratio is simply the P/E ratio divided by the EPS growth rate. The multiple considers the growth prospects of the company while capturing its growth rate. A company in the growth stage will realize more value than the company that already reached the maturity stage.
Thank you for reading this guide to LTM vs NTM. CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: