What is Last Twelve Months (LTM)?
LTM is shorthand for “last twelve months” and refers to the timeframe comprised of the financial performance of the most recent twelve-month period.
- What does “last twelve months” (LTM) mean?
- How are the last twelve months (LTM) financials different from the next twelve months (NTM) data?
- Under which situations might LTM metrics be relevant?
- What are the drawbacks to utilizing LTM financial metrics?
Last Twelve Months (LTM) Definition
Last twelve-month (LTM) metrics, which are often used interchangeably with “trailing twelve months” (TTM), are used to measure a company’s most recent financial state.
Typically, LTM financial metrics are calculated for a certain event such as an acquisition, or an investor seeking to evaluate the operating performance of a company in the prior twelve months.
The LTM income statement of a company is ordinarily compiled in full, but the two critical financial metrics in M&A tend to be:
- LTM Revenue
- LTM EBITDA
In particular, many transaction offer prices are based on a purchase multiple of EBITDA – hence, the widespread usage of calculating the LTM EBITDA.
The following steps are used to calculate the LTM financials of a company:
- Find the Last Annual Filing Financial Data
- Add the Most Recent Year-to-Date (YTD) Data
- Subtract the Prior Year YTD Data Corresponding to the Prior Step
Last Twelve Months (LTM) = Last Fiscal Year Financial Data + Recent Year-to-Date Data – Prior YTD Data
The process of adding the period beyond the fiscal year ending date (and subtracting the matching period) is called the “stub period” adjustment.
If the company is publicly traded, the latest annual filing data can be found in its 10-K filings, whereas the most recent YTD and corresponding YTD financial metrics to deduct can be found in the 10-Q filings.
Let’s say that a company has reported $10 billion in revenue in the fiscal year 2021. But in Q-1 of 2022, it reported quarterly revenue of $4 billion.
The subsequent step is to source the corresponding quarterly revenue – i.e. revenue from Q-1 of 2020 – which we’ll assume was $2 billion.
Here in our illustrative example, the LTM revenue of the company is $12 billion.
- LTM Revenue = $10 billion + $4 billion – $2 billion
- LTM Revenue = $12 billion
The $12 billion in revenue is the amount of revenue generated in the preceding twelve months.
LTM vs NTM Financials
In contrast to LTM financials, NTM financials – i.e. “next twelve months” – are more insightful for expected future performance.
Both metrics are “scrubbed” to remove any distorting impacts from non-recurring or non-core items.
More specifically in the M&A context, the LTM/NTM EBITDA of a company is typically adjusted for non-recurring items and does NOT align directly with U.S. GAAP, but the financials are more representative of the actual performance of the company.
Either can be used as the basis of the purchase multiple, but there must be a specific rationale as to why one was chosen over the either.
For example, a high-growth software company could potentially focus on NTM financials if its projected performance and growth trajectory are substantially distinct from its LTM financials.
LTM Revenue and LTM EBITDA Limitations
The primary concern with using LTM metrics is that the true impact of seasonality is not accounted for.
Retail companies, for instance, see a significant proportion of their total sales during the holidays (i.e. November to December).
Moreover, rather than falling precisely in line with the fiscal ending period, most acquisitions occur in the middle of a fiscal period.
Therefore, an LTM metric that neglects the back-weighted revenue of such companies without any normalization adjustments is prone to misinterpretations.
With that said, it is essential to take into consideration such factors when assessing LTM metrics, as the metric can be skewed – e.g. considers two high volume quarters as opposed to one fiscal period.