What are LTM and NTM Multiples?
Last Twelve Months (LTM) or Next Twelve Months (NTM) are two standard forms in which valuation multiples are presented in trading and transaction comps analyses. While LTM multiples are backward-looking and based on historical performance, NTM multiples are formulated from projected figures.
- For valuation multiples, what does “LTM” and “NTM” stand for?
- When are NTM multiples preferable over LTM multiples (and vice versa)?
- What are the trade-offs of using LTM / NTM multiples?
- If a multiple is denoted as a two-year forward multiple, what does this mean?
In This Article
Review of Valuation Multiples
Multiples in relative valuation consist of a measure of value in the numerator and a metric capturing financial performance in the denominator.
- Numerator (Valuation): Enterprise Value, Equity Value.
- Denominator (Performance): EBITDA, EBIT, Revenue, Net Income.
To ensure the comparisons are apples-to-apples, equity value must be matched with metrics that pertain solely to equity shareholders, while enterprise value must match with metrics applicable to all stakeholders (e.g. common and preferred equity shareholders, lenders / debt holders)
Last-Twelve Months (LTM) Multiples Overview
LTM stands for Last Twelve Months. LTM multiples refer to metrics representing past operating performance. For example, the amount of EBITDA generated by a company in the past twelve months would be classified as a LTM metric.
Alternatively, LTM multiple can be used interchangeably with the term “trailing twelve months”, or TTM.
In terms of presentation, both “LTM” and “TTM” can routinely be found in comps sheets.
Next-Twelve Months (NTM) Multiples Overview
NTM, on the other hand, stands for Next Twelve Months. Multiples denoted as NTM means the selected metric is based on the projected performance in the coming twelve months.
Therefore, a NTM multiple is considered a “forward multiple”, since the valuation is based on a forecast, rather than actual historical financial results.
Companies are also often acquired based on their future prospects (e.g. future revenue growth, margin improvements), which causes forward multiples to become more applicable in M&A scenarios.
High and Cyclical Growth
Three other scenarios that require heavier reliance on NTM multiples are companies that demonstrate:
- Significantly high growth (i.e. early stage growth companies) in which the company is growing at a pace where it’ll be significantly different one year from the prior year
- Cyclicality that causes the company’s financial performance to vary (sometimes dramatically) year-by-year.
- Seasonality in financial performance that requires a full yearly cycle to be captured in the operating metric (e.g. to avoid double-counting the holiday season for a clothing retailer).
Under the given contextual situations, historical multiples (LTM) are unlikely to represent the real value of the companies being valued, making them impractical to use.
Instead, forward multiples (NTM) would reflect a more accurate valuation while being more intuitive, as they provide a better picture of the company’s ongoing performance.
LTM vs NTM Multiples
From the view of many practitioners, especially those investing in technology-related and high-growth sectors, forward multiples (NTM) are preferred because they account for projected growth.
For high-growth companies, LTM can be a poor proxy that fails to factor in projected growth due to:
- Non-Recurring Expenses
- One-Time Cash Inflows
- Net Operating Losses (NOLs)
Most importantly, valuation is forward-looking for the most part – albeit historical performance can serve as the insightful basis to reference when creating the forecast.
However, past performance is NOT future performance, and the circumstances of a company (and industry) can change in an instant, especially in the digital age.
LTM multiples, such as LTM EBITDA, are usually used for transactions like leveraged buyouts (LBOs). However, LTM EBITDA is typically broken-down and scrutinized on a line-by-line basis.
LTM vs Forward Multiples Trade-Offs
When deciding between using a LTM or a forward multiple, there are some trade-offs to be aware of.
LTM multiples have the advantage of being based off of actual, factual results. For example, the fact that a company generated $200mm in revenue under accrual accounting standards can be found in its formally audited financial statements (i.e. even if analysts “scrub” and make adjustments to this figure later on).
But LTM multiples suffer from the issue that historical results can be, and quite often are, distorted by non-recurring expenses such as restructuring expenses and legal settlements, as well as non-recurring income (e.g. non-core asset sales).
In effect, the inclusion of such items can cause the metrics of companies to be misconstrued (and thus, misleading to investors).
One goal of relative valuation is to use multiples that properly account for the target company’s core, recurring operating performance.
To reiterate from earlier, historical metrics must be adjusted to exclude non-recurring items.
Forward multiples have the drawback of being subjective measures, where discretionary decisions can cause substantial differences in valuations.
Since projected EBITDA, EBIT, and EPS are all forecasts based on individual judgment, as well as management guidance, these figures tend to be less reliable relative to historical performance.
Hence, both LTM and forward multiples (e.g. NTM) are typically presented side-by-side, rather than picking one instead of another, as the decision is not mutually exclusive.
Excel File Download
Now, we’re ready to move on to an example calculation of the LTM and NTM multiple to better comprehend the contextual considerations.
To get started with the tutorial, just fill out the linked form below to download the file.
LTM and NTM Example Calculation
For our example calculation of the LTM and NTM multiple, we’ll assume the hypothetical buyout of a company affected by the break-out of COVID, with the peak negative impact occurring in 2020.
The target company had the following valuation data as of fiscal year 2020, which should reflect underperformance caused by COVID.
- LTM Enterprise Value (EV): $200mm
- LTM EBITDA: $20mm
In terms of the forward multiples valuation data:
- NTM EV: $280mm
- NTM EBITDA: $40mm
And for the 2-year forward data points:
- NTM + 1 EV: $285mm
- NTM + 1 EBITDA: $45mm
With those assumptions stated, we can calculate the EV / EBITDA multiples for each period.
- EV / EBITDA (LTM): 10.0x
- EV / EBITDA (NTM): 7.0x
- EV / EBITDA (NTM + 1): 6.3x
From the multiples listed above, we can distinguish the LTM multiple as an outlier from the three periods.
Given the COVID impact on EBITDA – which would be considered a one-time, non-recurring event – an acquirer would likely make an offer to purchase the hypothetical target company using a NTM multiple.
The true, normalized valuation multiple of the target appears to be around the 6.0x to 7.0x range, rather than around 10.0x.
The expansion of the LTM EV / EBITDA multiple can be attributed to the compressed EBITDA (and a comparatively steadier enterprise value – i.e. overall valuation remained relatively steady despite the reduction in EBITDA), which falsely inflates the valuation multiple.
Either the purchaser would bid off the NTM multiple, or adjust the LTM EBITDA by removing the “one-time” COVID-related impacts to normalize the multiple (i.e. Adj. EBITDA).
Upon doing so, the LTM multiple would converge closer to the approximate valuation range implied by the NTM and NTM + 1 multiples.