What is LTM EBITDA?
LTM EBITDA is a company’s earnings before interest, taxes, depreciation, and amortization across the trailing twelve months.
How to Calculate LTM EBITDA
The LTM EBITDA metric refers to a company’s EBITDA as of the most recent four quarters, i.e. the last 12-month period.
- LTM ➝ “Last Twelve Months”
- EBITDA ➝ “Earnings Before Interest, Taxes, Depreciation, and Amortization”
EBITDA is a non-GAAP metric that measures a company’s core operating cash flows. At its simplest form, a company's EBITDA is equal to the sum of its operating income (EBIT) and D&A.
- EBIT ➝ EBIT, or operating income, is the remaining profits of a company after subtracting its operating costs—cost of goods sold (COGS) and operating expenses (SG&A, R&D)—from its revenue in the same period.
- D&A ➝ D&A stands for “depreciation and amortization”, which are non-cash items recognized on a company’s income statement to abide by accrual accounting standards, i.e. the matching principle. Instead of recording the entire expense in the period of occurrence, the expense is recognized across the useful life assumption of the purchased fixed asset (i.e. capital expenditure) or intangible asset.
Below are the steps to calculate a company’s LTM EBITDA:
- Step 1 ➝ Compile Historical EBITDA Data
- Step 2 ➝ Add the Year-to-Date (YTD) EBITDA to the Latest Annual EBITDA
- Step 3 ➝ Subtract the YTD EBITDA from the Prior Year
- Step 4 ➝ Adjust the LTM EBITDA for Non-Recurring, One-Time Items
LTM EBITDA Formula
The formula for calculating LTM EBITDA is as follows.
LTM EBITDA = Latest Annual EBITDA + YTD EBITDA – Prior YTD EBITDA
The operating income (EBIT) of a company is a line item on the income statement, whereas the full D&A expense can be found on the cash flow statement (CFS).
- EBIT = Revenue – COGS – Operating Expenses
- D&A = Depreciation + Amortization
- EBITDA = EBIT + D&A
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Transaction Multiple: Purchase Price in M&A
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.
While negotiating the purchase multiple, the buyer and seller want the earnings metric that the purchase multiple is based upon to reflect the company’s most recent performance. Otherwise, the purchase price would not be based on the current financial state of the company, which can clearly be problematic, especially for the buyer.
Another consideration is whether the company is public or private, which is mostly related to the context of the calculation.
- Public Companies ➝ Publicly-traded companies report their financials on a quarterly basis per SEC filing requirements—assuming there is no confidential material available—so the adjustments are limited to quarterly financials. Thus, a couple of months might have passed since the most recent quarter. However, the analysis is likely done by an equity analyst or investor in the company's common shares, as opposed to an acquirer in M&A (e.g. by a strategic buyer or financial buyer).
- Private Companies ➝ In contrast, privately-held companies are not obligated to report their financial statements to the public. Therefore, the calculation of the company's LTM EBITDA implies their monthly financials are accessible (i.e. to a potential acquirer).
LTM EBITDA vs. NTM EBITDA Multiple: What is the Difference?
In M&A, the purchase multiple against which the valuation of the company is expressed is most often on either an LTM or NTM basis.
- EV/LTM EBITDA ➝ LTM EBITDA is a backward-looking metric, in which the operating performance reflected is of the past four historical quarters. Because EBITDA is a non-GAAP measure of profitability, adjustments are often made to normalize the metric, which is termed “Adjusted EBITDA”. EBITDA on an LTM basis is also used by lenders when calculating leverage multiples and interest coverage ratios (e.g. Total Debt/LTM EBITDA, LTM EBITDA/Interest Expense). As in the case of M&A, lenders will adjust the reported EBITDA figure to ensure non-core, non-recurring items do not distort the metric.
- EV/NTM EBITDA ➝ On the other hand, the NTM EBITDA multiple is a forward-looking metric, where the purchase multiple is based on a company’s projected future EBITDA. Most transactions use the LTM EBITDA of a company because a company’s actual financials hold more weight than forecasts, so the reliance on NTM EBITDA is considered to be riskier. In such a case, the buyer and seller must agree the target company's future performance is more representative of its real valuation, which can stem from an anomaly (e.g. pandemic), or upcoming developments with a material impact on the company. For example, an early-stage SaaS company might be set to sign a multi-year customer contract with a high certainty of closure that'll constitute a substantial percentage of its total revenue. In that case, the transaction multiple may be on an NTM basis (or a forecast even further out).
As mentioned earlier, adjustments to EBITDA are to be expected in practically all cases. The following list contains common examples of EBITDA adjustments:
- Non-Cash Items
- Non-Operating Income / (Expense)
- One-Time Gains / (Losses)
- Litigation Fees
- Asset Write-Down (e.g. PP&E, Inventory)
LTM EBITDA Calculator
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LTM EBITDA Calculation Example
Suppose you’re tasked with calculating the LTM EBITDA of a target company as part of a potential LBO.
The acquisition target is a privately-held company, and the following EBITDA figures were provided by management (and their sell-side representative).
| Month | Historical EBITDA |
|---|---|
| 1/31/2022 | $2.0 million |
| 2/28/2022 | $2.5 million |
| 3/31/2022 | $3.0 million |
| 4/30/2022 | $3.5 million |
| 5/31/2022 | $4.0 million |
| 6/30/2022 | $5.0 million |
| 7/31/2022 | $4.5 million |
| 8/31/2022 | $4.0 million |
| 9/30/2022 | $3.0 million |
| 10/31/2022 | $2.5 million |
| 11/30/2022 | $6.0 million |
| 12/31/2022 | $8.5 million |
| 1/31/2023 | $4.0 million |
| 2/28/2023 | $4.5 million |
| 3/31/2023 | $5.0 million |
If the latest monthly financials were prepared on March 31, 2023, i.e. the most recent month that the purchase multiple will be based on, the last twelve months start in the month of April 2022.
Using the “SUM” function in Excel, we’ll drag across the array selection starting from the reported EBITDA in April 2022 to March 2023, which yields an LTM EBITDA of $54.5 million.
- LTM EBITDA = $54.5 million
By dividing the LBO target's enterprise value by its LTM EBITDA, we would arrive at the implied purchase multiple.
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