What is LTM vs. 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.
LTM vs. NTM Multiples: Valuation Multiples Introduction
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)
LTM Multiples Definition
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.
- LTM = “Last Twelve Months”
- TTM = “Trailing Twelve Months”
NTM Multiples Definition
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.
LTM vs. NTM Multiples: Cyclicality Risk
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: Trailing and Forward Valuation
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.