LTM, NTM and Forward Multiples

Could somebody please list in a simple manner when for EV/EBITDA and P/E multiples would one use NTM, LTM and 1yr-forward numbers? I'm confused with that.

Difference Between NTM, TTM, LTM, and Forward Multiples

Ratios are very useful for the purposes of valuing businesses on a relative basis. However, it is important to understand the metrics that are being used so that you compare companies on an apples to apples basis.

Knowing that P/E and EV/EBITDA are some of the most popular metrics to use for valuation purposes we will use those to look at the different types of multiples.

We will discuss how these multiples are created below.

What does a Forward Multiple Mean?

A forward multiple uses the current price (for P/E) and the current enterprise value (for EV/EBITDA) and for the denominator references the earnings estimates (Net Income or EBITDA) for the future.

This could be a next twelve months (NTM) number or a 1 - 2 year forward earnings estimate. So if it is mid - 2018, the one year forward estimate would be for full year 2019. Typically investors only use t + 1 or t + 2 multiple. Past one year, it can be difficult to accurately project earnings so an estimate past two years is considered very unreliable.

re-ib-ny - Private Equity Vice President:
The benefit of a forward multiple (whether it's NTM, 1-yr fwd, 2-yr fwd) is that in theory an asset's value is based on its future cash flow, and a forward multiple allows you to compare companies based on some metric of future cash flow. The problem with a forward multiple is that projected future metrics (EBITDA, Earnings, Sales) are subject to guesswork and speculation.

NTM Meaning

NTM stands for the next twelve months which is a type of forward looking multiple. For the denominator, you would use earnings estimates (Net Income or EBITDA) for the next twelve months of company's operations. This should not be confused with the estimates for the next year of company operation. If it is March 2018 the NTM multiple would look at the earnings between March 2018 and March 2019.

This metric is a good way to look at how much you are paying for the companies earnings and the multiples that you are paying for them relative to other companies without having to consider how the company year's line up among the peer set.

What does LTM or TTM Stand For?

LTM stands for last twelve months and TTM stands for trailing twelve months which is a backward or historic looking multiple. It takes the current price (market value) or enterprise value (EV) on the top and then references the earnings (P/E) or EBITDA (EV/EBITDA) that were earned over the last twelve months of operations. This should not be confused with the last company year as that can be different. If it is March 2018 the LTM earnings metric will look at the earnings between March 2017 and March 2018.

re-ib-ny - Private Equity Vice President:
In an industry of businesses with relatively uniform growth prospects, you would tend to rely more on historical multiples since they're clean, factual, and reliable. However, when growth prospects differ, the historical multiples lose their relevance.

Check out a more detailed guide of how to build LTM multiples for the purposes of financial modeling below.

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Comments (38)

Aug 2, 2012 - 3:25am

Multiples are most applicable when evaluating peer companies, and your goal is to use the multiple that will give you the cleanest, most direct, apples-to-apples comparison.

The benefit of a forward multiple (whether it's NTM, 1-yr fwd, 2-yr fwd) is that in theory an asset's value is based on its future cash flow, and a forward multiple allows you to compare companies based on some metric of future cash flow. The problem with a forward multiple is that projected future metrics (EBITDA, Earnings, Sales) are subject to guesswork and speculation.

In an industry of businesses with relatively uniform growth prospects, you would tend to rely more on historical multiples since they're clean, factual, and reliable. However, when growth prospects differ, the historical multiples lose their relevance.

Best Response
Aug 2, 2012 - 3:43am
re-ib-ny:
Multiples are most applicable when evaluating peer companies, and your goal is to use the multiple that will give you the cleanest, most direct, apples-to-apples comparison.

The benefit of a forward multiple (whether it's NTM, 1-yr fwd, 2-yr fwd) is that in theory an asset's value is based on its future cash flow, and a forward multiple allows you to compare companies based on some metric of future cash flow. The problem with a forward multiple is that projected future metrics (EBITDA, Earnings, Sales) are subject to guesswork and speculation.

In an industry of businesses with relatively uniform growth prospects, you would tend to rely more on historical multiples since they're clean, factual, and reliable. However, when growth prospects differ, the historical multiples lose their relevance.

Interesting, does that mean PE firms look at historical multiples more?

For the small hf that i'm working at, we take forward multiple consensus as part of the analysis, because market almost always pay for forward multiples and rarely for historical multiples.

Mar 2, 2013 - 6:42am

When calculating historical multiples, EV/EBITDA and P/E, should I use FY+1 or FY+2 for both the denominator and numerator? Also, what can I do when there is not extensive coverage for a company I'm valuing, and as such estimates are not available during certain periods? Thanks

Mar 2, 2013 - 1:16pm

pu2011:
When calculating historical multiples, EV/EBITDA and P/E, should I use FY+1 or FY+2 for both the denominator and numerator? Also, what can I do when there is not extensive coverage for a company I'm valuing, and as such estimates are not available during certain periods? Thanks

If you are calculating historicals, you are using TTM. If you are looking at forward multiples, use FY+1 IMO. You can use FY+2 for additional context, but the accuracy diminishes the further you go out. Usually forwards are based on NTM (aka FY+1).

Mar 2, 2013 - 1:18pm

People focus on both for different reasons. The reasoning for NTM is if the market is forward looking (basic financial theory), than NTM makes more sense than LTM because it takes into account a year of growth. LTM may indicate overvaluation based on a multiple comparison, but NTM may render "fair value" b/c of the growth.

Obviously that means it makes more sense when you have a growing company.

Mar 2, 2013 - 1:19pm

Agree with PEinvestor. It is also looked at more within recurring revenue businesses that has strong visibility into forward earnings. Also, if you don't look at forward multiples, its hard to make a relative comparison of value between two companies as you are ignoring any concept of growth. Also could use a PEG concept for the same purpose.

Mar 2, 2013 - 1:22pm

Multiples for Different Companies/Purposes (Originally Posted: 10/08/2011)

Hi,

I've just started learning about investment banking and got a little bit confused with the different multiples used in valuations.

1) Is it correct that when accounting standards for D&A differ, you are more likely to use EBITDA instead of EBIT because different accounting standards won't impact EBITDA.

2) One uses EV/EBITDA-Capex for capital intensive businesses because applying any multiple on EBITDA-Capex (assuming Company A and B have same EBITDA), the company achieving EBITDA with a lower Capex receives a higher valuation/EV.

3) One can use EV/EBITDAR (rent) for real estate intensive businesses, e.g. restaurants or retailers. However, if my reasoning in #2 is correct, I don't understand EV/EBITDAR. Assume two companies (A, B) have the same EBITDA, but A achieves it with less rental expenses.
From this it follows that: EBITDAR (A) is smaller than EBITDAR (B). Given you multiply both EBITDAR with a multiple, you would have a higher valuation for B although it achieves the same EBITDA with higher rental costs. Sure B might have higher revenues as well but then its EBITDA margin would be lower. And a lower EBITDA margin ceteris paribus results in a lower valuation, no? If the reasoning in #2 is correct, wouldn't one use EBITDA-R?

4) Say you are comparing companies where D&A is a major expense, would you rather use (I) EBITDA multiples and thereby hinder the D&A costs from making any difference evident regarding the quality of assets of the companies or do you use an (II) EBIT multiple, because you want to see which companies have better assets/ have less D&A costs given that the business is nevertheless capital intensive.
I tend towards using EBIT because it tells me which company is more efficient post D&A on an, e.g. EBIT/Revenues basis and therefore makes differences among the companies more evident and allows for a more reliable valuation.

Thanks for your help!

Mar 2, 2013 - 1:24pm

1) Correct.
2) I suppose so, not really sure.
3) The goal of using EBITDAR is to measure the operating performance. I understand your issue with the multiple but you have understand it this way. We want to have a multiple that is stripped from all possible distortions (regulatory, accounting environment etc.) in order to calculate a useful metric.

Mar 2, 2013 - 1:26pm
Leidenschaft:
1) Correct.
2) I suppose so, not really sure.
3) The goal of using EBITDAR is to measure the operating performance. I understand your issue with the multiple but you have understand it this way. We want to have a multiple that is stripped from all possible distortions (regulatory, accounting environment etc.) in order to calculate a useful metric.

3) So you want to say that rent cost is excluded from EBITDA (measure for operating performance) because it is not regarded as an operating performance item and generally such a big factor?

I would be really happy if anyone could contribute to #4).

Thanks

Mar 2, 2013 - 1:27pm

Requesting a brief elaboration on trading multiples after reading R&P (Originally Posted: 12/24/2012)

Hey monkeys,

I've been going through Rosenbaum and Pearl over the past few days, and have a brief valuation question in regards to trading multiples: what exactly is the point of using these multiples? I feel like I'm missing something.

Hypothetical situation: Let's say that you're calculating an EV/EBITDA multiple in a comparable comps analysis for a certain target. You spread your comps, calculate the relevant multiples for comparable companies in the same universe, and arrive at a valuation range of 7.0x - 8.0x for the EV/EBITDA multiple. Then you take these multiples and apply it back to the EBITDA of the target in question to arrive at its EV. Correct so far?

If so, why do you need to use multiples to calculate the EV of a company? Doesn't every public company already have their own EV to begin with (equity value + debt + minority interests - cash/cash equivalents)?

One possibility I can think of is if the target in question is a private company where you can't calculate their equity value, and thus need a relevant multiple to calculate their EV. Or perhaps to get a better "average" of what other companies in the sector that the target is competing in are trading at in order to eliminate company-specific aberrations?

Thanks for any thoughts!

P.S. Rosenbaum and Pearl mention a "universe" of companies. Is this lingo used in the industry? I haven't seen it in any other interview guides / websites, and want to make sure that it's reflective of the terminology actually used in investment banking before spouting it off in an interview.

Mar 2, 2013 - 1:28pm

lol, read the comparable companies chapter again. we value the target based on the multiples of OTHER, RELEVENT companies in a universe.

The difference between successful people and others is largely a habit - a controlled habit of doing every task better, faster and more efficiently.
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Mar 2, 2013 - 1:29pm

mhurricane:
lol, read the comparable companies chapter again. we value the target based on the multiples of OTHER, RELEVENT companies in a universe.

Yes, I understand this. I apologize if my wording wasn't clear in the OP. My understanding is as follows:

1) Select the universe of comparable companies
2) Locate the necessary financial information
3) Spread key statistics, ratios, and trading multiples of comparable companies
3a) In my example above, let's say that the most relevant comparable companies gave you an EV/EBITDA valuation range of 7.0x - 8.0x. Would you take this valuation range and apply it back to the target company's EBITDA to determine its EV?

If so, my question is: why can't you just calculate a public company's EV using the standard EV formula instead of going through all of these steps?

Mar 2, 2013 - 1:30pm

How do you get a range when you calculate a median or average? Did you try to apply what you read to the excel files given? I am trying to help you, and you gave me a "-1." If you are having trouble with comps, good luck learning anything else about valuation (which is not difficult).

If your median EV/EBITDA was 7.5x, you would apply this to the target's EBITDA to get EV.

The difference between successful people and others is largely a habit - a controlled habit of doing every task better, faster and more efficiently.
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Mar 2, 2013 - 1:31pm

mhurricane, I did not give you a -1. Regardless, you have not answered my question whatsoever, and are instead insulting me on an irrelevant point.

The BIWS guide explicitly said that valuation should be conducted in ranges and not as a single number, as the process of valuation isn't as simple as nailing down a a single, explicit multiple (e.g. the football fields).

Straight from the BIWS guide:
"The most common incorrect interpretation of a valuation is that it tells you how much a company is worth. It does not – it only gives you a range of possible values for a company."

If I'm incorrect in thinking so, I don't mind being told. However, I think it's a little disingenuous for you to imply that I can't grasp valuation concepts based off of a discrepancy totally unrelated to my question in the first place.

Mar 2, 2013 - 1:32pm

Yes, the target, if public, has an easily discernible EV (equity + debt + preferred + NCI - cash). What multiples analysis is designed to tell you is whether the EV (based on the market or book values of the above) is the 'right' value. If the peers are all trading way higher than your target, and there doesn't appear to be a good reason for this, it may tell you that the target value should be higher in an acquisition. The point of comps is find a range of possible values to inform what the company might fetch in a sale, not what the market currently values the firm at (which is easy to find).

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Mar 2, 2013 - 1:33pm

Thank you, Boothorbust. I think I suggested something similar to that in my OP, and wanted to confirm the rationale.

To be clear, comps are conducted to discern a RANGE of possible values, correct? mhurricane is leaving me a little confused by alleging that I don't understand comps because I provided a range of multiples (7.0x - 8.0x) instead of a single multiple. Which one is correct?

Mar 2, 2013 - 1:34pm

A Fellow Linguist:
Thank you, Boothorbust. I think I suggested something similar to that in my OP, and wanted to confirm the rationale.

To be clear, comps are conducted to discern a RANGE of possible values, correct? mhurricane is leaving me a little confused by alleging that I don't understand comps because I provided a range of multiples (7.0x - 8.0x) instead of a single multiple. Which one is correct?

Sorry, I did not mean to come off as condescending. The reason you have a "range" for the valuation is because you utilize multiple valuation methodologies (DCF, Comparable Companies, Precedent Transaction) to come up with a "value." Have you gotten to the part about the "football field?"

The only way you can get a "range" of multiples when doing comps is through sensitivity analysis. As I did it during my internship, I would apply a median or average multiple to the target to get an EV. If I were to get a range of EVs using comparable companies, this would be done through sensitivity analysis (changing multiple applied and inspecting its affect on EV).

Hope this helps.

The difference between successful people and others is largely a habit - a controlled habit of doing every task better, faster and more efficiently.
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Mar 2, 2013 - 1:35pm

multiples (Originally Posted: 04/17/2007)

i just had a phone interview with a boutique bank. they asked me what multiple would i use if i had to choose just one to valuate any company? i said EBITDA because investors only care about the cash flows and DA are noncash charges. he said that it was wrong. so...what exactly was the answer he was looking for? i'm thinking EV/Ebitda because EV strips away the effect of debt and measures it against ebitda.

Mar 2, 2013 - 1:36pm

Ebitda itself isn't a multiple. Like you said, EV/ebitda is a firm multiple - used if you wanted to buy the whole company (pay off debt and acquire 100% equity stake). Use P/E if you are simply looking at acquiring the equity of the firm. Common stock investors typically look at p/e unless the industry is highly capital intensive (lots of depreciation), in which case they may use ev/ebitda. LBO / acquisition will look at firm value multiples because, along with acquiring the equity, they will most likely have to issue new debt to replace the old.

Mar 2, 2013 - 1:39pm
Westcoasting:
well you dont have to control the equity of a firm.

Westcoasting, could you explain this further? I'm a bit confused as well about how (or if) one can buy out the equity of a firm, but not be responsible for the debt. Does it depend on how much of the equity an investor buys out?
Mar 2, 2013 - 1:40pm

Like if you are looking to buy a share or a few shares or 5% of the float you want to be able to value the entir equity.

If you buy out all or a controlling portion of a firms equity -- you receive all the assets less liabilities aka you need to refinance the debt if the lenders have clauses that say it has to be renegotiated during a sale ( most do ).

So most likely if you control all the equity in a firm it would be time to refinance the debt.

  • 1
Mar 2, 2013 - 1:42pm

Yes. I was just trying to say that the average joe buying stock in a company is going to look at an equity multiple (p/e) because that's what he's buying. You will hear more equity analysts discussing p/e than ev/ebitda (though they do both).

It's true that buying a majority stake will triger covenants on most debt requiring you to refinance it. EV multiple, therefore, seems to be more appropriate when you are looking to acquire a firm or recapitalize it.

Mar 2, 2013 - 1:43pm
bmwhype:
i just had a phone interview with a boutique bank. they asked me what multiple would i use if i had to choose just one to valuate any company? i said EBITDA because investors only care about the cash flows and DA are noncash charges. he said that it was wrong. so...what exactly was the answer he was looking for? i'm thinking EV/Ebitda because EV strips away the effect of debt and measures it against ebitda.

The EBITDA relative multiple would give you an EV on the high end, which would favor the seller more so than the buyer. This is because EBITDA, a measure of operating income, doesn't deduct charges on taxes, non-cash expenses (DD&A), and interest on debt. EBITDA includes the free cash flow portion, and the expenses listed above, so it's not a very good indicator of the real cash generating power of the firm you are valuing.

Public companies manage their earnings with depreciation of tangibles, and amortization of intangibles to inflate their performance, so EBITDA may overvalue your target. P/E multiples, though market dependent, is another way to go for equity value, and revenue multiple for firm value.

Mar 2, 2013 - 1:44pm
thadonmega:
bmwhype:
i just had a phone interview with a boutique bank. they asked me what multiple would i use if i had to choose just one to valuate any company? i said EBITDA because investors only care about the cash flows and DA are noncash charges. he said that it was wrong. so...what exactly was the answer he was looking for? i'm thinking EV/Ebitda because EV strips away the effect of debt and measures it against ebitda.

The EBITDA relative multiple would give you an EV on the high end, which would favor the seller more so than the buyer. This is because EBITDA, a measure of operating income, doesn't deduct charges on taxes, non-cash expenses (DD&A), and interest on debt. EBITDA includes the free cash flow portion, and the expenses listed above, so it's not a very good indicator of the real cash generating power of the firm you are valuing.

Public companies manage their earnings with depreciation of tangibles, and amortization of intangibles to inflate their performance, so EBITDA may overvalue your target. P/E multiples, though market dependent, is another way to go for equity value, and revenue multiple for firm value.

i'm a little confused. when people say the earnings multiple, are they referring to any multiple with earnings as the denominator? or, strictly the p/e ratio?

because market cap/earnings i read somewhere is also considered the earnings multiple

Mar 2, 2013 - 1:46pm
thadonmega:
Earnings multiple and p/e multiple are the same thing, and if multiplied with the # of shares outstanding, it gives you the equity market cap, and if you add in debt that gives you the firm or enterprise value.

thanks. that really cleared it up for me.

but what about shares that are privately held in addition to public shares?

Mar 2, 2013 - 1:48pm

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