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 metric 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 flowCalculate Operating Cash FlowThe operating cash flow formula depicts the operational cash flow acquired after deducting the operating expenses from the total revenue. It can also be evaluated as the aggregate of net income, changes in assets and liabilities and non-cash expenses. 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. It 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 the pure operating results of any young company. It 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 made 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 MarginEBITDA MarginEBITDA Margin is an operating profitability ratio that helps all stakeholders of the company get a clear picture of the company's operating profitability and cash flow position. It is calculated by dividing the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) by its net revenue. EBITDA Margin = EBITDA / Net Sales 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 RatiosProfitability RatiosProfitability ratios help in evaluating the ability of a company to generate income against the expenses. These ratios represent the financial viability of the company in various terms. which is calculated as
TTM EBITDA Margin = TTM EBITDA / Total TTM RevenueTTM RevenueLTM revenue, which stands for Last Twelve Months revenue (also known as TTM – trailing twelve months revenue), is the company's total revenue in the twelve months before the date of measurement; this helps in the company's valuation during a particular time..
2) TTM EBITDA Coverage
TTM EBITDA Coverage Ratio is a kind of Solvency Ratio that defines how much cash a company has generated in the last twelve months period from its operating activitiesOperating ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production. 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 ratiosKey Financial RatiosFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on. 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 EBITDAEnterprise Value / LTM EBITDAEV to EBITDA is the ratio between enterprise value and earnings before interest, taxes, depreciation, and amortization that helps the investor in the valuation of the company at a very subtle level by allowing the investor to compare a specific company to the peer company in the industry as a whole, or other comparative industries..
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 accounting statements. So it is always better to consider debt-capital structure, capital expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year., 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 –