Valuation

LTM vs. NTM Multiples

Guide to Understanding LTM vs. NTM Multiples

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.

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LTM vs. NTM 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.

LTM vs. NTM Multiples Calculator – Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

LTM vs. NTM Multiples Calculation Example

For our example LTM vs NTM multiple calculations, 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 an 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-19 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. Adjusted EBITDA).

Upon doing so, the LTM multiple would converge closer to the approximate valuation range implied by the NTM and NTM + 1 multiples.

LTM vs. NTM