One of the most commonly used metrics for Valuation in Investment Banking is the Enterprise Value / LTM EBITDA (or EV / LTM EBITDA) Multiple. We’d then look for the latest Year-To-Date Revenue data in Uber’s most recent 10-Q filing. To calculate LTM Revenue, we’d begin by finding the Company’s latest Annual Revenue in Uber’s most recent 10-K filing. Below we’ve included a simple, visual example of an LTM calculation on a timeline so you can more easily see how each of the pieces from the steps above come together. With this calculation, we can quickly compute the latest Twelve Months of data at any point in the year. Because of fluctuations like this within each year, we typically want to see a full year of Financial data.
For instance, in a discounted cash flow (DCF) model, using LTM data enhances the reliability of projected revenue streams and expense patterns. This approach identifies trends or anomalies that may not be apparent from static annual reports. These are the key financial ratios from the point of view of investors, and they can calculate the same for (NTM) next twelve months 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. EBITDA is reported on a trailing twelve-month basis ltm ebitda and serves as a substitute for the company’s operating revenue.
This reexamination paints a more accurate and promising picture for potential buyers of your company’s worth and potential. Do not confuse it for manipulating your statements – due diligence will uncover any inconsistencies, so this is not an opportunity to hide the facts. The benefit to the EBITDA multiple is that it takes company debt into account, which other multiples like the Price-to-Earnings ratio doesn’t consider. For example, let’s say Company A has determined their EBITDA is $600,000, while their total revenue is $6,000,000. This is then compared to Company B, which has a larger EBITDA of $750,000, but with total revenue of $9,000,000.
Leverage ratios are critical financial metrics used to assess a company’s debt levels relative to its equity or assets. These ratios offer insights into the financial structure of a company and its ability to meet financial obligations. Industry benchmarks and standards play a pivotal role in interpreting these ratios, as they provide a comparative backdrop against which individual company performance can be measured. Different industries have varying capital structures and financing norms, which means that a leverage ratio considered healthy in one industry might signal financial distress in another. LTM metrics such as LTM EBITDA and LTM interest coverage ratio are commonly used in credit analysis. These figures help assess a company’s ability to generate sufficient cash flow to service its debt.
The Debt to EBITDA ratio is calculated by dividing a company’s liabilities by its EBITDA value. The lower the ratio, the more likely a business will be able to pay any obligations when they are due, while a higher value means it could be difficult to clear their debts, acting as a warning sign for buyers. When presenting your company’s EBITDA and other financials for the purpose of exiting the business, you should aim to present data stretching back 3-5 years. This volume of information demonstrates the development of your business over time, reassuring buyers that your growth potential is consistent, and you haven’t just had one remarkable year. Operating income is a company’s profit after subtracting operating expenses, such as depreciation and amortization. EBITDA goes the step further of stripping these out entirely to develop a firm understanding of a company’s profitability.
To derive LTM figures, analysts typically sum the quarterly results from the last four quarters. For instance, if the current quarter is Q3 2023, the LTM would include data from Q through Q3 2023. Long-term metrics (LTM) play a crucial role in financial analysis and valuation, offering a more comprehensive view of a company’s performance over the past twelve months. This period captures recent trends and smooths out short-term volatility, providing investors and analysts with a clearer picture. LTM revenue, or Last Twelve Months revenue, reflects a company’s total sales over the most recent twelve-month period.
The acquisition target is a privately-held company, and the following EBITDA figures were provided by management (and their sell-side representative). The usage of LTM EBITDA tends to be most common in M&A transactions, such as a leveraged buyout (LBO). For example, the purchase multiple in an LBO can be based on the acquisition target’s LTM EBITDA. Level up your career with the world’s most recognized private equity investing program. The next step is to get the matching quarterly revenue, which we’ll consider to be ₹150 crore, or revenue from Q1 of 2021. The result of this calculation never affects a balance sheet since a balance sheet is created at a certain date and time, independent of the events that occur during the year.
It does this by removing the impacts of non-operating decisions made by the existing management, such as interest expenses, tax rates, or significant intangible assets. LTM figures offer a distinct perspective compared to other metrics such as trailing twelve months (TTM) or annualized data. While LTM and TTM are often used interchangeably, LTM emphasizes recent performance, making it particularly relevant for companies experiencing fluctuating business cycles or strategic shifts. LTM revenue is a widely used metric in the finance sector in order to determine the financial state of a business. Instead of using the quarterly results and extending them to the entire year, LTM or TTM revenue provides information about how a business performed over the previous year. Operating income can be defined as the profit after removing the company’s operating expenses, including amortization and depreciation.
It analyzes and compares profitability among companies and industries, eliminating the impacts of financing, government, and other accounting decisions to provide a raw indication of earnings. Therefore, it is readily used by owners, buyers, private equity investors, and analysts worldwide. It is an important standout formula that provides an overview of business value, assisting companies and individuals in making crucial business decisions.
The Analysts then submit their estimates to aggregators like FactSet and Bloomberg. As a result, they tend to focus on the future performance, which is captured by Next Twelve Months (or ‘NTM’) Revenue and EBITDA. On the other hand, LTM metrics do not offer insight into what will happen in the future. Lenders to Private Equity deals focus primarily on past performance (or ‘Creditworthiness’) to ensure they will be repaid. An Investment Banker would typically calculate the EV / LTM EBITDA Multiple for several peer companies.
EBITDA takes this further by removing and identifying depreciation and amortization expenses. By breaking down different expenses and their impact on a company’s worth, EBIT and EBITDA help us understand the bigger picture of its value. Consequently, the measure reflects a business’s operating profitability, which owners, investors, and stakeholders can compare with other companies. For this reason, EBITDA is often preferred over other metrics when deciding which business is more attractive in a mergers and acquisition (M&A) strategy. It also allows analysts to look at financial performance in light of recent economic or regulatory events.
Benchmark for ValuationWhile discounted cash flow (DCF) models value a business by focusing on free cash flows, EBITDA is a reference point that analysts often use to compare companies within the same industry. EBITDA is also compared with Seller’s Discretionary Earnings (SDE), which determines the business’s historical cash flow. The main difference that settles the EBITDA vs. SDE debate relates to the size of the business. EBITDA is generally employed for larger corporations and organizations, whereas SDE is more suitable for smaller companies.
Operating income is used to analyze the production efficiency of the company’s operations. EBITDA indicates a company’s ability to consistently profit, while net income indicates a company’s total earnings. Net income is generally used to identify the value of earnings for every share of the business.
It should be noted that the EBITDA does not take into account the changes in working capital and is therefore not a measure of cash flows. It is a profitability measure and should ideally be used in conjunction with other metrics to assess a company’s performance. Above all else, EBITDA’s importance is now as the standout formula and language applied by professional buyers, private equity investors and more when discussing business value. It is often used as a proxy for cash flow, and can help provide an estimated valuation range for your company overall by using the EBITDA multiple. In its simplest definition, EBITDA is a measure of a company’s financial performance, acting as an alternative to other metrics like revenue, earnings or net income.
For instance, a potential acquirer might look at the LTM revenue and EBITDA to gauge the target’s profitability and operational efficiency. These figures help in determining whether the acquisition will be accretive or dilutive to the acquirer’s earnings. By focusing on the most recent twelve months, companies can avoid the pitfalls of relying on annual reports that may not reflect current market conditions or recent operational changes. LTM metrics also play a central role in discounted cash flow (DCF) analyses, serving as a reliable starting point for projecting future cash flows.
More specifically, it gives stakeholders an idea of how a company’s operations are funded and how capable it is of meeting its financial obligations. Understanding the role of LTM (Last Twelve Months) EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is crucial in evaluating a company’s financial health. This metric serves as a proxy for the company’s current operational profitability by excluding non-operating expenses and revenue, as well as non-cash charges. It’s a favored tool among investors, creditors, and analysts because it focuses on the outcome of core business activities, providing a clearer picture of operational efficiency and cash generation capability. Seasonality can significantly impact a company’s financial performance, making it essential to adjust LTM metrics to account for these fluctuations.
Nevertheless, both are useful calculations to apply when valuing a business, as operating income is effective at analyzing the production efficiency of a company’s core operations and expense management. While EBITDA is defined as an indication of a company’s ability to make a consistent profit, net income outlines a company’s total earnings. This difference means net income is preferably used to determine the value of earnings per share of a business, rather than its overall earning potential, which is where EBITDA proves useful. All of the information required to complete either EBITDA formula should be included on your balance sheet. A single mistake in these values will lead to an inaccurate EBITDA, which could overvalue or undervalue your company’s profitability.
