LTM vs. NTM Multiples

LTM vs. NTM Multiples: What is the Difference?

Multiples in relative valuation consist of a measure of value in the numerator and a metric capturing financial performance in the denominator.

Where:

• Value Measure ➝ Enterprise Value (TEV), Equity Value (Market Cap)
• Value Driver ➝ EBITDA, Operating Income (EBIT), Revenue, Net Income

Equity value must be matched with metrics that pertain solely to equity shareholders to ensure apples-to-apples comparisons.

In contrast, enterprise value must match metrics applicable to all stakeholders, such as common shareholders, preferred equity holders, and debt lenders.

• Enterprise Value Metrics ➝ EBITDA. EBIT, Revenue, Free Cash Flow to Firm (FCFF)
• Equity Value Metrics ➝ Net Income, Earnings Per Share (EPS), Free Cash Flow to Equity (FCFE)

The LTM and NTM multiple can be applied to estimate a company’s enterprise value (TEV) or equity value (i.e., market capitalization).

• LTM ➝ “Last Twelve Months”
• NTM ➝ “Next Twelve Months”

If an NTM multiple is used, the implied enterprise value is derived from a projected figure, such as the NTM EBITDA.

Likewise, the implied equity value from an NTM multiple is based on a projected figure, such as the NTM net income (or the forward-looking earnings per share, i.e. “EPS”).

Conversely, the LTM multiple is applied to a historical figure, such as an LTM EBITDA, which also yields an implied enterprise value.

Since LTM EBITDA is based on historical data rather than a pro-forma forecast, the multiple derived via performing comps or a discounted cash flow (DCF) analysis tends to be higher.

Why? The value driver, or denominator of the valuation multiple, is usually lower for LTM multiples compared to NTM multiples.

However, despite the variance in the LTM and NTM multiple, the implied enterprise value (or equity value) should be relatively similar, in theory.

Therefore, the LTM and NTM methods are used concurrently to establish a valuation range in practice, which provides a more comprehensive estimate of a company’s fair value.

How to Calculate LTM Multiples

LTM stands for “Last Twelve Months.” LTM multiples refer to metrics representing past operating performance.

For example, a company’s EBITDA generated in the trailing twelve months (TTM) would be classified as an LTM metric.

LTM multiples can be used interchangeably with the term “trailing twelve months” or TTM. In terms of presentation, both “LTM” and “TTM” are routinely found in comps sheets.

• LTM ➝ “Last Twelve Months”
• TTM ➝ “Trailing Twelve Months”

The formula for calculating a company’s metric on a last twelve months (LTM) basis is as follows.

The process of adding the period past the latest fiscal year and subtracting the matching period is referred to as the “stub period” adjustment.

The latest annual filing data can be found in its 10-K filings if the company is publicly traded. In contrast, the most recent year-to-date (YTD) and corresponding YTD data to deduct are recorded in the 10-Q filings.

How to Calculate NTM Multiples

NTM, on the other hand, stands for “Next Twelve Months.”

If a valuation multiple is denoted as NTM, the selected metric is based on projected performance in the coming twelve months (i.e., pro-forma forecast).

Therefore, an NTM multiple is considered a “forward multiple” since the valuation is based on a forecast rather than actual historical financial results.

Companies are often acquired based on their future prospects (e.g. forward-looking revenue growth, margin improvements), which causes forward multiples to become more applicable in M&A scenarios.

How to Pick Between LTM or NTM Multiples

Three common scenarios that require reliance on NTM multiples, as opposed to LTM multiples, are companies that demonstrate the following:

1. High-Growth ➝ Significantly high growth, 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
2. Cyclicality ➝ The cyclicality of a market can cause a company’s financial performance to fluctuate year by year. The cyclicality risk refers to the irregular patterns that occur at unpredictable intervals (and impact the operating performance of an industry or sector).
3. Seasonality ➝ The seasonality in financial performance requires an entire yearly cycle to be captured in the operating metric. For instance, double-counting the holiday season for a clothing retailer would cause an inflated valuation.

Under 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, providing a better picture of the company’s ongoing performance.

LTM vs. NTM Multiples: What are the Pros/Cons?

Many practitioners, especially those investing in technology-related and high-growth sectors, prefer forward multiples (NTM) 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 (e.g. Legal Settlements, Asset Impairment, Restructuring Fees)
• One-Time Cash Inflows / (Outflows)
• Net Operating Losses (NOLs)

Most importantly, the subject of valuation itself is generally forward-looking, although historical performance can function as an insightful basis for creating the forecast.

However, past performance is NOT future performance, and the circumstances of a particular company (and industry) can change at any given period.

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. NTM Multiples: Comparison of Trade-Offs

When deciding between using an LTM or a forward multiple, there are some trade-offs to be aware of.

• Historical Data ➝ LTM multiples have the advantage of being based on actual, factual results. For example, a company’s formally audited financial statements show that it generated $200mm in revenue under accrual accounting standards, even if analysts “scrub” and adjust the figure later.
• Distorted Financial Data ➝ However, LTM multiples suffer from the fact that historical results can be distorted by non-recurring expenses such as restructuring expenses, legal settlements, and 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).
• Pro-Forma Adjustments ➝ The core objective of relative valuation (or comps) 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.
• Discretionary Assumptions ➝ 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 and management guidance, these figures tend to be less reliable relative to historical performance.

With that said, LTM and NTM multiples are usually presented side-by-side rather than chosen one over the other, as the decision is not mutually exclusive.

LTM vs. NTM Multiples Calculator — Excel Template

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

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1. LTM Multiple Calculation Example

Suppose we’re tasked with estimating the equity value of a publicly traded company using the LTM and NTM P/E multiples.

The company’s current stock price is $60 per share, and the total number of diluted shares outstanding is 100 million, which we’ll assume was determined using the treasury stock method (TSM).

Financial Assumptions

• Stock Price = $125.00
• Total Number of Diluted Shares Outstanding = 100 million

The company’s latest 10-Q filing for Q1–2024 reported $185 million in net income, while the most recent 10-K filing for FY-2023 reported $600 million.

• Q1-2024 Net Income = $185 million
• FY-2023 Net Income = $600 million

If we assume the company reported $160 million in net income for Q1–2023—i.e., the stub period to deduct—we can calculate LTM net income by inserting the provided figures into the formula, which comes out to $625 million.

• Q1-2023 Net Income = $160 million
• LTM Net Income = $600 million + $185 million – $160 million = $625 million

Given those assumptions, we can obtain the equity value (or market cap) by multiplying the latest closing stock price by the total number of diluted shares outstanding.

• Equity Value = $125.00 × 100 million = $12.5 billion

The LTM P/E multiple can be derived by dividing the market cap by the LTM net income, which is 20.0x.

• LTM P/E Multiple = $12.5 million ÷ $625 million = 20.0x

2. NTM Multiple Calculation Example

In the next section, we’ll calculate the NTM P/E multiple using forward-looking estimates.

The NTM net income is projected to be $1 billion, an implied earnings growth of 60% YoY compared to the LTM net income.

• NTM Net Income = $1 billion

The equity value, or market cap, remains constant at $12.5 billion.

Therefore, the remaining step is to divide the market cap by the NTM net income to arrive at an NTM P/E multiple of 12.5x.

• NTM P/E Multiple = $12.5 billion ÷ $1 billion = 12.5x

3. LTM vs. NTM Multiple Calculation Analysis

The LTM P/E of 20.0x is higher than the forward NTM P/E of 12.5x, which reflects that the market is pricing in substantial earnings growth soon.

Therefore, the current stock price of $125 appears relatively cheaper on a forward basis than a backward-looking basis.

The NTM P/E of 12.5x implies that investors in the market are willing to pay $12.50 for every $1 of projected earnings in the upcoming year.

The underlying company seems to be at the growth stage, considering the implicit 60% growth in net earnings year over year (YoY).

Since the LTM multiple is more appropriate for mature companies at the later stages of their lifecycle, exhibiting single-digit growth, the NTM multiple is likely to be a more practical measure of value here because it captures the expected growth and future earnings power.

In closing, the NTM P/E ratio is more likely used by equity analysts to compare the stock price to industry peers and determine whether the market values it as undervalued, overvalued, or fairly valued.