What is LTM EBITDA (TTM)?
LTM EBITDA (Last Twelve Months EBITDA) is a calculation of earnings of the company before netting interest, taxes and depreciation & amortization components for the past twelve consecutive months.
- LTM EBITDA is an important metrics used in the valuation of businesses as it is more focused on the operating results of the company for the immediate last twelve months period.
- Additionally, it is one of the finest measurement tools to calculate operating cash flow as it computes the operating income before deducting interest expenses, taxes and depreciation & amortization expenses considering the present scenarios.
Please note that LTM EBITDA is also known as TTM EBITDA (Trailing Twelve Months)
LTM EBITDA Calculation
Let us have a look at the following income statement of company ABC.
Let us first calculate the EBITDA during the calendar year
- = EBITDA (Q1 2017) + EBITDA (Q2 2017) +EBITDA (Q3 2017) +EBITDA (Q4 2017)
- = $123 + $154 + $192 + $240 = $708
Now that we have calculated calendar EBITDA, let us calculate the last twelve months EBITDA (assuming that you are calculating LTM EBITDA in the month of April 2018)
- LTM EBITDA = EBITDA (Q1 2018) + EBITDA (Q4 2017) +EBITDA (Q3 2017) +EBITDA (Q2 2017)
- TTM EBITDA = $300 + $240 + $192 + $154 = $886
Use of LTM EBITDA
- TTM EBITDA is used in Mergers and Acquisitions. The potential buyers prefer to value the acquisition price of Target Company based on TTM EBITDA which helps them to determine the actual operating performance of the company without taking effects of its financial and investment decisions.
- LTM EBITDA gives an idea about pure operating results of any young company and also tells about the effect of synergy in operating performances of any restructured company.
- Investors make use of EBITDA while calculating various valuation ratios and they compare it with other potential Target Companies. However, the purchase of Target Company may be done at any point in time and using previous year-end EBITDA to calculate financial ratios may signify incorrect valuation results to the investors. Hence, it is the most appropriate practice among the technicians to calculate LTM EBITDA by taking the financial history of the last twelve months only and compute the valuation ratios.
TTM EBITDA in Ratio Analysis
1) TTM EBITDA Margin
LTM EBITDA Margin refers to how much operating cash a company can generate against its total revenue in the last twelve months? This is one of the crucial Profitability Ratios which is calculated as
TTM EBITDA Margin = TTM EBITDA / Total TTM Revenue.
2) TTM EBITDA Coverage
TTM EBITDA Coverage Ratio is a kind of Solvency Ratio which defines how much cash a company has generated in the last twelve months period from its operating activities to cover its financial obligations i.e. interest and lease expenses. It can be calculated as
LTM EBITDA Coverage Ratio = TTM EBITDA + LTM Lease Expenses / LTM Interest Expenses + LTM Principle Repayment + LTM Lease Expenses
These are the key financial ratios from the point of view of investors and they can calculate the same for (NTM) next twelve months period to have better clarity about the company. LTM EBITDA is also used as a denominator in the valuation of Target Company i.e. Enterprise Value / LTM EBITDA.
LTM EBITDA simply helps us understand the company’s core operating cash flow and how good the company is in managing their operating decisions. However, many companies use this metric for windows dressing their financial statements. So it is always better to consider debt-capital structure, capital expenditure and net income of the company while considering TTM EBITDA as a sole valuation metric.
LTM EBITDA Video
This has been a guide to LTM EBITDA. Here we discuss TTM EBITDA calculation along with practical examples and its uses in valuation, ratio analysis, and M&A. You may learn more about accounting from the following articles –
- Formula to Calculate EBITDA
- Examples of Solvency Ratio Formula
- Advantages of Coverage Ratios
- Capital Expenditure (CAPEX) Formula
- Formula of Net Income
- Importance of Ratio Analysis
- Calculate Cash Flow Return on Investment
- Price to Cash Flow Ratio Valuation
- Trailing vs Forward PE Ratio
- Calculate EBITDAR