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.
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 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.
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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