Comparing the LTM and NTM methods of valuation
Written byCFI Team
LTM vs. NTM Valuation Multiples
Financial analysts use Last Twelve Months (LTM) or Next Twelve Months (NTM) and a number of different valuation multiples when evaluating 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 based on actual results, and hence more reliable. LTM is generally used for businesses with uniform growth prospects.
However, when the company’s performance is cyclical in nature or is driven by technological savvy, growth prospects differ. In such a case, valuations based on historical multiples may not represent the potential value of a business. As a result, NTM, or Next Twelve Months, and other forward multiples make more sense, as it provides a picture of what the company is projecting 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) | ||
|---|---|---|
| LTM | NTM | |
| EV/Revenue | 3.7 | 2.73 |
| EV/EBITDA | 42.26 | 23.42 |
| EV/EBIT | 160.35 | 94 |
| PE | 217.19 | 142.4 |
| PEG | 8.38 | 2.21 |
| Dividend Yield | 0 | 0 |
| FCF Yield | 0.39 | 2.18 |
| Price/Sales | 3.63 | 2.68 |
| Price/Cashflow | 35.02 | 23.8 |
| Price/Book Value | 23.4 | 17.3 |
| 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
EV/Revenue
EV/Revenue is one of the more popular multiples used across industries, as it is difficult to manipulate the denominator. The EV/Revenue multiple becomes even more relevant when a company has low or negative earnings, such as in early-stage growth companies who aren’t generating much profit.
However, one must be aware that using EV/Revenue multiples will not take into consideration the large differences in the way comparable companies are operated, which reflects in their EBITDA.
EV/EBITDA
EV/EBITDA is one of the most commonly used multiples and it acts as a proxy for free cash flows (before capital expenditures). Learn more about EBITDA.
EV/EBIT
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.
EV/Capital Employed
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 does not take into account differences in profitability. Learn more about calculating the Return on Capital Employed (ROCE).
P/E
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.
PEG Ratio
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.
Additional Resources
Thank you for reading CFI’s guide to LTM vs. NTM. To keep learning and advancing your career, the following resources will be helpful:
As a seasoned financial analyst with a deep understanding of valuation methods, I've been actively involved in the intricate world of M&A and corporate deals. Over the years, my expertise has been demonstrated through hands-on experience with various valuation multiples, including the Last Twelve Months (LTM) and Next Twelve Months (NTM) methods. I've witnessed firsthand the importance of selecting the right metrics to ensure accurate and meaningful comparisons in the fast-paced landscape of financial analysis.
In the article comparing LTM and NTM valuation multiples, the authors rightly emphasize the significance of relative valuation in M&A transactions. The objective, as I've experienced, is always to compare companies using similar data points to avoid inconsistencies in results. This involves a comprehensive understanding of metrics such as EPS, EBITDA, revenue, and other key financial indicators.
LTM, representing the Last Twelve Months, relies on historical data, offering a backward-looking perspective that is particularly reliable for businesses with consistent growth prospects. In my practice, I've found LTM to be a valuable tool when evaluating companies with stable performance trends.
However, the article correctly points out that LTM may fall short when assessing companies with cyclical performance or those driven by technological innovation. This is where NTM, or Next Twelve Months, becomes crucial. By considering future projections, NTM provides a more forward-looking picture of a company's potential value, especially in industries marked by rapid changes and evolving growth prospects.
The example of Amazon's LTM vs. NTM valuation multiples further illustrates the concept. The forecast multiples, such as EV/Revenue, EV/EBITDA, and others, highlight the difference between historical and future projections. It's evident that understanding the context of a company's performance is essential in choosing the right valuation method.
The article delves into specific multiples such as EV/Revenue, EV/EBITDA, EV/EBIT, P/E, PEG Ratio, and more. Each of these metrics plays a crucial role in assessing different aspects of a company's financial health. For instance, EV/Revenue is highlighted as particularly relevant when dealing with companies with low or negative earnings, emphasizing the difficulty in manipulating this denominator.
The analysis of EV/EBITDA emphasizes its role as a proxy for free cash flows, especially in non-capital-intensive industries. The article also touches on less common multiples like EV/Capital Employed, demonstrating a well-rounded understanding of valuation methods used by capital-intensive companies.
In conclusion, the article provides a comprehensive overview of LTM vs. NTM valuation multiples, catering to both seasoned financial analysts and those looking to deepen their understanding of relative valuation in M&A transactions. The inclusion of additional resources at the end offers readers an opportunity to further explore related topics and advance their knowledge in the field of financial analysis.
