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realistically nobody in the world can predict the future. I appreciate NTM numbers but to me makes most sense to use LTM
This is silly. Certain industries/growth profiles much better to use NTM
Maybe for revenue multiples but I can’t think of a business type where I’d be 100% in every single cost line item for NTM EBITDA multiples. Also lenders only base their leverage on LTM, who gives a rats ass what management thinks will happen in the future? It’s not real
NTM is best, you underwrite future results. That said, some lenders might be testing covenants on LTM basis so for leverage purposes LTM is sometimes used.
Do you buy a business for past earnings or future earnings power?
IMO it depends on the industry.
If it's a high growth business in a high growth industry, NTM makes more sense given the year-over-year change can be significant.
If it's a steady/low/no growth business, LTM makes more sense to me. For folks mentioning the concept of "paying for future earnings," this is true, but I'd argue any material changes to the steady/low/no growth business that influence go-forward financials should be PF in that LTM EBITDA anyway. E.g., if they raised prices in the last few months then that can be PF for the entire LTM, as that is reflective of the reality of the earnings power on a go-forward.
It always makes me nervous to pay NTM because if that forward figure is missed you will have overpaid.
In reality I like to look at both LTM and NTM to get a sense of what I'm paying / what I'm paying for.
The comps for both will be different so you can use both to gauge, but far and wide, you use LTM. Main reasons for this:
1) Management is always, always going to project higher EBITDA because it looks better, and then want you to pay for that growth that has come out of thin air. Past results are real, so you can actually anchor to it--it's much more likely that you'll have a flat year than an up year.
2) Lenders primarily look at LTM, similar reasons shared
3) It's easier to hide things in future projections than it is in past performance, so even if there is no top line growth, EBITDA is likely overstated for NTM, and LTM doesn't have that issue
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