NTM EBITDA

What is NTM EBITDA?

NTM EBITDA is a forward-looking profitability metric that reflects a company’s projected operating performance in the coming year.

In practice, the NTM EBITDA metric is most often used to portray the pro forma, expected operating performance of a particular company on a normalized basis.

NTM EBITDA

Table of Contents

How to Calculate NTM EBITDA
NTM EBITDA Formula
NTM vs. LTM EBITDA: What is the Difference?
TEV / NTM EBITDA Multiple Formula
NTM vs. LTM EBITDA Multiple: What is the Difference?
How to Analyze NTM EBITDA Multiple in M&A Analysis
1. NTM EBITDA Calculation Example
2. TEV / NTM EBITDA Calculation Example
3. LTM to NTM EBITDA Bridge Analysis

How to Calculate NTM EBITDA

NTM EBITDA measures a company’s projected operating performance, while removing the effects of discretionary capital structure decisions, tax jurisdiction, and non-cash expenses (D&A).

NTM ➝ “Next Twelve Months”
EBITDA ➝ “Earnings Before Interest, Taxes, Depreciation, and Amortization”

The NTM EBITDA is unique in the sense that the pro forma profitability metric focuses on a company’s future operating performance (“forward-looking”), rather than the reported historical performance (“backward-looking”).

In particular, the NTM EBITDA metric is most useful to analyze companies currently undergoing significant changes, wherein the most recent historical performance might be a subpar proxy for a company’s operating performance (and cash flow).

Common scenarios in which the NTM EBITDA can be deemed appropriate include companies exhibiting substantial revenue growth or those operating in sectors characterized by cyclicality.

High-growth firms that operate in an industry like SaaS or certain segments in healthcare often use NTM EBITDA because future performance is expected to differ significantly from past results.

For example, a software company with strong projected growth might focus on NTM financials to capture its anticipated value.

The drawback to NTM metrics, however, is that the figures are based on projections, which may not materialize because of unexpected changes in the market or competitive dynamics — while susceptible to discretionary management bias, often contributing toward overly optimistic assumptions.

The step-by-step process to calculate the NTM EBITDA is as follows:

Step 1 ➝ Forecast NTM Revenue
Step 2 ➝ Estimate NTM EBITDA Margin (%)
Step 3 ➝ Multiply NTM EBITDA Margin by NTM Revenue

NTM EBITDA Formula

The NTM EBITDA formula multiplies a company’s NTM EBITDA margin assumption by NTM revenue.

NTM EBITDA = NTM EBITDA Margin (%) × NTM Revenue

Where:

NTM EBITDA Margin (%) ➝ The projected EBITDA margin assumption based upon management guidance, the industry benchmark (“comps”), recent historical performance, and trend analysis.
NTM Revenue ➝ The projected revenue of a company, which is determined using recent growth trajectory and understanding the core drivers of sales.

In short, the more industry insights and company-specific data available on hand while forecasting either component of NTM EBITDA, the more reliable the metric should be, considering the projection is derived from a comprehensive understanding of a company’s unit economics and operating drivers that underpin its performance.

Otherwise, the absence of such data to support the projection causes NTM EBITDA to be impractical (“garbage in, garbage out”).

NTM vs. LTM EBITDA: What is the Difference?

Simply put, the LTM EBITDA is a backward-looking measure of profitability and based upon historical performance, whereas NTM EBITDA is a forward-looking metric, obtained from a forecast.

Characteristic	LTM EBITDA	NTM EBITDA
Time Orientation	“Backward-Looking”	“Forward-Looking”
Data Source	Actual Financial Reports (10-K, 10-Q)	Projections, Estimates, and Industry Reports (e.g. Equity Research)
Reliability	High (Based on Reported Data — i.e. Factual)	Variable (Forecast-Dependent)
Use Case	Credit Analysis and Historical Benchmarking	Valuation of Growing (or Changing) Companies
Sensitivity to Recent Changes	Low (May Miss Recent Strategic Shifts)	High (Incorporates Anticipated Future Events)
Complexity	Lower (Based on Historical Data)	Higher (Requires Forecasting)

TEV / NTM EBITDA Multiple Formula

The EV/NTM EBITDA multiple is a forward-looking valuation ratio that compares a company’s enterprise value (TEV) to its NTM EBITDA.

TEV/NTM EBITDA = Enterprise Value (TEV) ÷ NTM EBITDA

Where:

Total Enterprise Value (TEV) = Equity Value + Net Debt
NTM EBITDA = NTM Revenue × NTM EBITDA Margin (%)

The TEV/NTM EBITDA—most frequently used in the context of M&A—can be the metric by which the purchase price is determined (and serve as a reference point to guide negotiations on the purchase price).

The more the operational performance of a company is expected to change, the greater the variance between the LTM and NTM multiple.

However, the implied enterprise value (and thus, equity value) should be relatively similar, if not the same, in theory.

The utility of the TEV/NTM EBITDA multiple stems from performing comparative analysis to industry peers (“comps”) and identifying the underlying operating drivers contributing toward the difference (i.e. the assumptions).

Therefore, the LTM and NTM multiples tend to be used concurrently to establish an approximate valuation range, in which a far more comprehensive analysis of a company’s estimated value (and insights) can be derived — not to mention, the two can be used as a “sanity check” to ensure the estimated valuation (i.e. total enterprise value) is reasonable relative to industry comparables.

NTM vs. LTM EBITDA Multiple: What is the Difference?

Multiple	Description
EV/LTM EBITDA	Backward-looking valuation multiple based on the past four quarters (or past twelve months), typically used for mature companies with stable financials. Often further adjusted to compute the “Adjusted EBITDA”, which can be done via excluding non-recurring, non-cash, and extraordinary items to the sake of normalization, facilitating an “applies to apples” comparison across industry peers. Widely used in M&A transactions and by lenders for calculating key financial ratios, such as leverage ratios (e.g., Total Debt/LTM EBITDA) and interest coverage ratios (e.g., LTM EBITDA/Interest Expense). Concrete basis for valuation negotiations due to its reliance on actual historical performance. The drawback is that the historical performance, even if recent, might not capture recent operational changes or future growth potential, which can have a material impact that understates the valuation of rapidly growing companies (or implementing operational changes).
EV/NTM EBITDA	Forward-looking metric based on projected next twelve months’ EBITDA Less common in transactions, considered riskier due to forecast reliance, unless historical performance is not a reliable proxy due to industry-specific factors (or company-specific factors, like operational restructuring). Used when future performance is expected to differ significantly from past, such as high-growth companies expanding into new markets and right on the verge of introducing new products to the market, which aren’t reflected by LTM data. Transctions where the EV/NTM EBITDA multiple are applicable tend to coincide with deal structures with earnouts to mitigate forecast risk (and incentivize performance-based contingency payments, which are only earned if certain targets are met).

Multiple

Description

EV/LTM EBITDA

Backward-looking valuation multiple based on the past four quarters (or past twelve months), typically used for mature companies with stable financials.
Often further adjusted to compute the “Adjusted EBITDA”, which can be done via excluding non-recurring, non-cash, and extraordinary items to the sake of normalization, facilitating an “applies to apples” comparison across industry peers.
Widely used in M&A transactions and by lenders for calculating key financial ratios, such as leverage ratios (e.g., Total Debt/LTM EBITDA) and interest coverage ratios (e.g., LTM EBITDA/Interest Expense).
Concrete basis for valuation negotiations due to its reliance on actual historical performance.
The drawback is that the historical performance, even if recent, might not capture recent operational changes or future growth potential, which can have a material impact that understates the valuation of rapidly growing companies (or implementing operational changes).

EV/NTM EBITDA

Forward-looking metric based on projected next twelve months’ EBITDA
Less common in transactions, considered riskier due to forecast reliance, unless historical performance is not a reliable proxy due to industry-specific factors (or company-specific factors, like operational restructuring).
Used when future performance is expected to differ significantly from past, such as high-growth companies expanding into new markets and right on the verge of introducing new products to the market, which aren’t reflected by LTM data.
Transctions where the EV/NTM EBITDA multiple are applicable tend to coincide with deal structures with earnouts to mitigate forecast risk (and incentivize performance-based contingency payments, which are only earned if certain targets are met).

How to Analyze NTM EBITDA Multiple in M&A Analysis

In M&A, the purchase multiple (or entry multiple) can be determined using either a historical (LTM) or projected (NTM) EBITDA.

Ultimately, the choice is contingent on which method better represents the company’s value going-forward.

One of the fundamental concepts in valuation is that the perceived value is forward-looking, i.e. investors contribute capital to profit from the upside potential of the company with regard to growth, margin expansion, and free cash flow (FCF), not past performance — albeit, the two are closely intertwined, of course.

The point here is that the fair value of a company is disproportionately oriented around future performance, as opposed to past historical performance.

Why? The past accumulated growth and profitability sets the foundation of a potential investment, whereas the potential growth and profitability are the core determinants of the return (IRR and MOIC), from the perspective of a financial buyer, like a private equity firm.

Hence, a financially sound company could be a “pass” as an investment opportunity in a secondary buyout (“sponsor-to-sponsor”), if the new firm decides the upside potential and levers to pull to improve growth and profit margins have been exhausted by the prior sponsor (i.e. minimal opportunities for incremental value creation).

Market Anomolies — COVID-19 Pandemic Example

In early 2020, the COVID-19 pandemic (and the widespread lock-down period) had a material impact on companies, publicly-traded and privately-held.

On that note, the LTM EBITDA of companies around that period are, in all likelihood, not a fair depiction of a company’s operating performance and cash flow generative capabilities.

Therefore, the NTM EBITDA addresses that issue by forecasting performance to align with historical periods—excluding the pandemic-related matters—which should be intuitive, considering most were not operating for a decent amount of time (or had to incur substantial expenses).

To elaborate on the latter point, the incurrence of expenses that are not part of the normal course of business should not be reflected in the EBITDA metric, as including such items contradicts the reason why EBITDA is used in the first place.

1. NTM EBITDA Calculation Example

Suppose we’re tasked with calculating the NTM EBITDA and EV/NTM multiple on behalf of a growth-oriented tech private equity firm currently considering a potential leveraged buyout (LBO) of a high-growth B2B enterprise software company.

The transaction assumptions that pertain to our illustrative training exercise are as follows:

Total Enterprise Value (TEV) = $600 million
Fiscal Year Ending Date = December 31, 2023 (Q-4)
Current Date = June 30, 2024 (Q-2)

The LTM financial data of the target company, as of June 30, 2024, are as follows:

LTM Revenue = $120 million
LTM EBITDA = $24 million
LTM EBITDA Margin = $24 million ÷ $120 million = 20.0%

The NTM financial data—which covers the projection period from July 1, 2024, to June 30, 2025—are as follows:

NTM Revenue = $160 million
NTM EBITDA Margin = 25.0%

In our scenario, the LTM revenue and NTM revenue reflect incremental growth of $40 million, implying a 33.3% increase.

To reiterate from earlier, the NTM EBITDA is most applicable to companies currently exhibiting high growth; hence, the forward-looking profitability metric is appropriate for usage here.

On the other hand, the EBITDA margin was 20% and 25% in the LTM and NTM periods, respectively — which is an improvement of 5%.

Using the revenue-based approach, we’ll multiply the NTM revenue by the NTM EBITDA margin to calculate the NTM EBITDA:

NTM EBITDA = $160 million × 25.0% = $40 million

2. TEV / NTM EBITDA Calculation Example

With the NTM EBITDA on hand, the next step is to determine the enterprise value, which we’ll assume to be equivalent to the acquisition price (i.e., cash-free, debt-free transaction, or “CFDF”).

The total enterprise value (TEV) is $600 million, with no further calculation necessary, since the assumption was clearly stated at the start of our exercise:

Total Enterprise Value (TEV) = $600 million

For the sake of comparability, and to affirm the necessity to collectively present both variations of the two valuation multiples, expressed on an LTM and NTM basis:

TEV / LTM EBITDA = $600 million ÷ $24 million = 25.0x
TEV / NTM EBITDA = $600 million ÷ $40 million = 15.0x

In short, the enterprise software company is “growing into” its multiple, i.e., the valuation multiple is more meaningful by analyzing on an NTM basis, rather than an LTM basis, as the trailing performance is not indicative of future performance.

On the subject of performing trading comps or transaction comps—the two main methods of relative valuation—a TEV/NTM EBITDA multiple of 15x is far better suited for comparability relative to a 25x multiple.

Why? The revenue growth rate grew by 33.3%, from the LTM to NTM period.

If the revenue growth was higher, say 50%+ in 2023, the multiple would not be meaningful

Given the fact that a higher EBITDA figure coincides with a lower EV/NTM EBITDA multiple, that statement reflects why certain practionioners prefer to utilize a projection-based multiple.

As the disclaimer goes, “Past performance is no guarantee of future results”.

Yet, the aforementioned quote is far more influential on certain industries than others (and those particular industries are precisely where NTM metrics and NTM multiples are more applicable).

Note: The total enterprise value (TEV) must remain constant and never be forecasted.

3. LTM to NTM EBITDA Bridge Analysis

If we analyze the growth from LTM to NTM EBITDA and focus on the incremental growth sources, the composition of the core operating drivers attributable to the variance between the LTM and NTM EBITDA can be understood on a more granular basis.

Revenue Growth

LTM EBITDA = $24 million
Incremental Revenue = $160 million – $120 million = $40 million
LTM Margin Impact = $40 million × 20.0% = $8 million

Margin Improvement

NTM Revenue = $160 million
Incremental Margin Improvement = 25.0% – 20.0% = 5.0%
Margin Improvement Impact = $160 million × 5.0% = $8 million

Once we quantify the composition of the underlying operating drivers—the components of EBITDA that caused the LTM EBITDA to deviate apart from the NTM EBITDA—we can expand upon the formula to obtain more insights on the initial assumptions (and identify where the potential issues lie).

NTM EBITDA = $24 million + $8 million + $8 million = $40 million

The NTM EBITDA formula portrays the bridge between LTM EBITDA and NTM EBITDA, where the two +$8 million stem from revenue growth and margin improvement.

But to reiterate, as it bears repeating, the implied valuation remains fixed at $600 million.

Implied Valuation = 15.0x EV/LTM EBITDA × $24 million = $600 million
Implied Valuation = 25.0x EV/NTM EBITDA × $40 million = $600 million

In closing, the next step hereafter is for the PE firm to conduct further in-depth diligence into the unit economics of the target acquisition to compile more financial and operating data to support the notion that the forecast is, in fact, defensible.