What it means
Annual reports only come out once a year, so by the time you read them they can be several months out of date. LTM fixes this by rolling the clock forward.
It takes the latest full-year figure, adds the new months reported since, and removes the same months from the previous year. Because it always covers twelve months, LTM smooths out seasonal swings.
A retailer that earns most of its profit in the festive quarter would look very different if you compared six months with a full year, but a twelve-month window always includes every season exactly once. This makes company-to-company and period-to-period comparison fairer.
In practice LTM is the basis for many valuation multiples, such as enterprise value to LTM earnings before interest, tax, depreciation and amortisation (EBITDA, a measure of operating profit before certain costs). Lenders also test LTM figures against loan covenants, which are conditions set by the bank.
Buyers in deal negotiations use LTM because it reflects what the business is earning now, not what it earned last year. The term is often written as TTM, meaning trailing twelve months, and the two mean the same thing.
Some people also use the phrase last twelve months for non-financial measures, such as customer sign-ups. An important nuance is that one-off items can distort the number.
If the period includes a large unusual gain, loss or restructuring cost, analysts will usually adjust the LTM figure to show the underlying trend. A good habit is to show LTM beside the last annual figure and the budget so that readers can see direction as well as size.
If LTM is rising against the annual number, the business is growing, and if it is falling, something has changed since the year-end that deserves a question.
In practice
Real-world examples.
Example
A private equity analyst values a software business at ten times its LTM earnings. The last annual report is eight months old, so using LTM captures recent growth and avoids undervaluing the company by several million dollars.
Example
A bank checks that a manufacturer's LTM interest cover stays above the level required in its loan agreement. The ratio is tested every quarter on a rolling twelve-month basis, so a bad quarter is spread across the year instead of triggering an immediate breach.
Example
A marketing director compares LTM revenue per customer for two product lines. Because both numbers cover a full year, a seasonal spike in one line does not mislead her when she decides where to spend next year's budget.
Formula
Calculation
LTM figure = Last full-year figure + Current year-to-date figure - Prior-year figure for the same year-to-date period
A company reported revenue of $48,000,000 for its last financial year. In the current year, the first nine months produced $38,000,000, compared with $33,000,000 in the same nine months of the prior year. LTM revenue = 48,000,000 + 38,000,000 - 33,000,000 = $53,000,000. That is $5,000,000 higher than the last annual report, showing growth that the annual figure alone would hide.Case study
Seen in the real world.
Pinecrest Outdoor Gear is an illustrative, fictional retailer being considered for acquisition by a larger chain. Its last annual accounts, now nine months old, showed profit before interest and tax of $6,000,000. The buyer's analyst calculated the LTM figure by adding the latest nine months and subtracting the same period a year earlier.
The LTM profit came to $7,500,000, because the company had opened new stores and raised prices. Valuing it on the annual figure would have underpriced it by roughly $1,500,000 multiplied by the deal multiple, so the seller's adviser insisted on LTM. The illustrative lesson is that the choice of reference period can move a purchase price noticeably.
The seller's adviser also reminded the buyer that LTM profit included a one-off gain of $400,000 from selling an old warehouse. After removing it, the fictional buyer used an adjusted figure, and the two sides agreed a price that reflected the underlying trend.
Watch out
Common mistakes.
- Using the last annual figure when the business has changed materially since, which can understate or overstate its true size.
- Adding nine months of this year to twelve months of last year, instead of adding the new months and removing the same months from the prior year.
- Ignoring one-off items inside the LTM period, which can make performance look better or worse than the underlying trend.
Questions
People also ask.
Is LTM the same as TTM?
Yes, trailing twelve months and last twelve months mean the same thing, and the choice of wording is mostly a matter of habit.
Why is LTM used in valuation instead of the financial year?
It reflects the most recent performance, so buyers and investors are not forced to rely on figures that may be many months old.
Can LTM be used for balance sheet items?
Usually no, because balance sheet items are a snapshot at a point in time, so LTM is used for flows such as revenue, costs and cash flow.
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