Updated July 10, 2023
Definition of LTM EBITDA
LTM EBITDA is the Last twelve-month Earnings before Interest, Tax, Depreciation, and amortization. It is one of the popular relative valuation metrics used for businesses’ valuation purposes in their early to medium growth stage. It is also known as TTM EBITDA (Trailing Twelve-month).
In its simplest form, it intends to measure the performance of a business purely on the grounds of its operating performance without the impact of different taxation rules, depreciation treatment, and capital structure (mix of Debt and Equity). It is a historical valuation measure and is frequently used in Mergers, takeovers, and amalgamation purposes, to name a few.
Explanation
Measuring the performance of two identical businesses requires some relative valuation tools. Among them, it is one such metric that helps make operational performance comparison easy to understand and appreciate for the intended user community.
It provides a recent one-year performance of the business, which helps in averaging outlier quarters and provides a more concise view of the year’s performance comprising the last twelve months. This figure forms part of the company’s financial analysis report, and value is attached to the business based on multiple LTM EBITDA.
How to Calculate LTM EBITDA?
Calculating LTM EBITDA is a straightforward process and simple to understand as well. This method is unaffected by financial leverage and makes comparisons between businesses easy to understand and appreciate. Also, calculating it is a very simple process, as shown below.
Let’s explain this with the help of two companies:
| Particulars | Company A | Company B |
| Net sales for the year
Q1 Q2 Q3 Q4 |
600000
125000 100000 200000 175000 |
800000
125000 100000 200000 175000 |
| EBITDA for the last four quarters (12 months)
Q1 Q2 Q3 Q4 |
108000
25000 15000 38000 30000 |
106000
18000 26000 32000 30000 |
| LTM EBITDA | (25000+15000+38000
+30000)= 108000 |
(18000+26000+32000
+30000)=106000 |
| LTM EBITDA/SALES | (108000/600000)=0.18 | (106000/800000)=0.13 |
| EBITDA/ SALES (most recent quarter Q4) | (30000/175000)=0.17 | (30000/175000)=0.17 |
Thus, we can observe that EBITDA/SALES for the most recent quarter provide the same multiple of 0.17; however, using LTM EBITDA provides better insights and multiplier differences, leading to better valuation for the two companies.
Example of LTM EBITDA
ABC International Limited has reported the following data:
| Particulars | 31.03.2020 | 31.12.2019 | 30.09.2019 | 30.06.2019 |
| Sales | $200,000 | $180,000 | $65,000 | $140,000 |
| Expenses | $120,000 | $110,000 | $22,000 | $85,000 |
| Depreciation | $18,000 | $13,500 | $18,000 | $9,000 |
| Interest expenses | $25,000 | $14,000 | $22,000 | $13,000 |
| Tax expense | 7400 | 8500 | 600 | 6600 |
| Net Profit | $29,600 | $34,000 | $2,400 | $26,400 |
Based on the above, let’s compute LTM EBITDA:
| Particulars | 31.03.2020 | 31.12.2019 | 30.09.2019 | 30.06.2019 |
| EBITDA | $80,000 | $70,000 | $43,000 | $55,000 |
LTM EBITDA as on 01.04.2020= ($80000+$70000+$43000+$55000) = $248,000
Uses
It offers multiple usages across various spectrums of functions. The main uses are enumerated below:
- Helps in the valuation of the business more objectively as it is more focused on operational performance and unaffected by a capital structure, making it an apt measure of comparing similar businesses.
- Useful for various ratio analyses such as EV/LTM EBITDA, Sales/LTM EBITDA, etc.
- It is based on actual historical data, which makes it more credible and unaffected by subjective assumptions.
- Due to its historical nature, it lacks any forward-looking usage and disinterests those more interested in knowing the future multiples than past ones.
LTM EBITDA vs NTM EBITDA
Both are used in conjunction and provide a healthy way to analyze a company; however, there are differences between the two, as enumerated below:
| Basis | LTM EBITDA | NTM EBITDA |
| Introduction | It is based on the last twelve months’ data and involves actual data. | It is based on the next twelve months’ data and more on assumptions that differ from person to person and are subjective. |
| Accuracy and reliability | It is more accurate and reliable. | It is less accurate and subject to change compared to LTM EBITDA. |
| Preceding | It precedes NTM EBITDA. | It is forward-looking and uses LTM EBITDA as the premise for forecasting and other business projections. |
Advantages
Some of the advantages are given below:
- Easy to compute and understand the same.
- It is prone to less manipulation compared to other valuation matrices.
- It is based on published data, making it more accurate and reliable.
- Removes variable which is not relevant such as Depreciation, Interest expenses, etc.
Disadvantages
Some of the disadvantages are given below:
- It considers only twelve-month data, which is too small a period to make any meaningful insights.
- It doesn’t reflect the cash tax paid by the business and is a poor proxy if one measures the firm’s Free Cash flow.
- LTM EBIDTA also ignores the cash flow effects on account of investment in the business’s Working Capital and Fixed Investment.
- It is purely historical and doesn’t incorporate any future projections, which is necessary for any potential investor.
- It is not an apt valuation matrix for seasonal or cyclic businesses. Also, this matrix cannot measure business in new technology areas.
Conclusion
It is a popular valuation matrix that is an apt measure for companies with stable growth prospects and unaffected by personal bias on future projections as it is based on actual data. However, it lacks usage in companies with cyclical and seasonal impacts, limiting its usage. In addition, at times, LTM EBITDA can be manipulated by businesses through excessive use of leverage to artificially inflate operating profit since it ignores interest components paid on debt borrowing is not considered. Despite the shortcomings, the method finds its utility in valuation matrices used by the business while undertaking Mergers and Acquisitions and in normal parlance to analyze operational efficiency simultaneously.
It is one such relative valuation matrix and cannot be used as the only matrix in valuing business due to its inherent shortcomings. It can only be used in conjunction with more forward-looking relative valuation measures.
Recommended Articles
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