Definition
LTM EBITDA stands for Last Twelve Months Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a measure of a company’s operational performance and profitability over the previous 12 months. By excluding non-operating costs like interest, taxes, depreciation, and amortization, it focuses on the earnings from the core business operations.
Key Takeaways
- LTM EBITDA, which stands for Last Twelve Months Earnings Before Interest, Taxes, Depreciation, and Amortization, is usually used for valuation and analysis of the company’s operating performance. It measures a firm’s profitability over a full 12-month period, thus providing a comprehensive view of a business’s profitability trends.
- Compared to EBITDA, LTM EBITDA is often preferred for its ability to mitigate seasonality effects or short-term fluctuations, rendering it a more accurate barometer of a company’s ongoing performance. It is significantly employed by investors and analysts for valuation of companies, especially for M&A transactions.
- The LTM EBITDA, however, has its limitations. It doesn’t account for capital expenditures, changes in working capital, or debt repayments. Furthermore, because it adds back non-cash expenses, the LTM EBITDA may inflate operational cash flows. For a deeper understanding of a company’s financial health, considering other financial measures along with LTM EBITDA is highly recommended.
Importance
LTM EBITDA, which stands for Last Twelve Months Earnings Before Interest, Taxes, Depreciation, and Amortization, is a crucial financial metric as it provides a clear and accurate snapshot of a company’s operational profitability over the last year.
It allows investors, creditors, and other stakeholders to assess a company’s financial performance and its ability to generate operating earnings.
By excluding interest, taxes, depreciation, and amortization, it isolates operational earnings, stripping out factors that might obscure the company’s true profitability from its core operations.
It also enables comparable analysis across companies and sectors, as it negates the effects of varying tax structures, financing methods, and asset types.
So, LTM EBITDA is invaluable both in terms of business valuation and making informed decisions on a company’s potential for future profitability.
Explanation
LTM EBITDA, otherwise known as last twelve months Earnings Before Interest, Taxes, Depreciation, and Amortization, is a significant financial metric used by companies and investors to assess business performance and value. It reflects the profitability of a company’s core business operations, excluding the effects of capital structure, taxation, and non-cash expenses.
This time period of the last twelve months provides a near-term, rolling snapshot of the business’ financial health and performance and allows a direct comparison period over period while smoothing out seasonal or periodic variances. The LTM EBITDA serves several key purposes.
Investors often use it as a valuable tool in making investment decisions because it provides a clear picture of a business’s profitability, irrespective of fiscal year structures. It allows for comparison among companies across different industries, even when these companies have different tax environments, capital structures, or non-cash accounting practices.
It’s also commonly used in mergers and acquisitions as a gauge of business value, forming the basis of EBITDA multiples. Lastly, lenders often use LTM EBITDA to determine a company’s ability to service and repay debt, which can influence the company’s access to new loans or impact the terms of existing loans.
Examples of LTM EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is used to analyze and compare profitability among companies and industries because it eliminates the effects of financing and accounting decisions. “LTM” stands for “Last Twelve Months” and it’s usually used for comparing the company’s performance over the past 12 months.Example 1: A manufacturing company ABC Ltd reported $1 million net income, $200,000 interest, $300,000 tax, and $500,000 depreciation & amortization for the last twelve months. Therefore, their LTM EBITDA would be $2 million ($1M net income + $200K interest + $300K tax + $500K DA).Example 2: A tech start-up XYZ Inc. reported a net loss of $2 million, with depreciation and amortization of $1 million, and interest and taxes not applicable since they aren’t profitable. Hence, despite being unprofitable in net terms, their LTM EBITDA is -$1 million which might be more appealing to potential investors.Example 3: A retail company DEF Corp. reported EBITDA of $100,000 in the most recent quarter. If we could consider this EBITDA for each quarter of the last year, then their LTM EBITDA would be $400,
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.
LTM EBITDA FAQ
What is LTM EBITDA?
LTM EBITDA is an abbreviation for Last Twelve Months Earnings Before Interest, Taxes, Depreciation, and Amortization. It represents a company’s earnings prior to interest, taxes, depreciation, and amortization expenses for the preceding twelve months. It’s used as a way to analyze and compare profitability between companies and industries as it eliminates the impact of financing and capital expenditures.
Why is LTM EBITDA important?
LTM EBITDA is important because it gives a clear picture of a company’s operational profitability by eliminating non-operating and non-cash expenses. This makes it beneficial for entities with significant amounts of fixed assets that are depreciated over a long period of time. Also, companies usually use LTM EBITDA for valuation purposes while acquiring other companies.
How is LTM EBITDA calculated?
To calculate LTM EBITDA, you first need to determine a company’s earnings before subtracting interest, taxes, depreciation, and amortization (EBITDA). Then, to calculate the LTM EBITDA, simply sum up the EBITDA of the last twelve months. The formula is: EBIT + Depreciation and Amortization = EBITDA; then, EBITDA of each of the last twelve months are added together.
Does LTM EBITDA have any limitations?
While LTM EBITDA is a useful measure, it also has its limitations. It does not take into account the capital expenditure of a company, making companies with high capital expenditures appear more profitable than they really are. Additionally, it does not account for changes in working capital or debt repayments, which can also impact a company’s profitability.
Related Entrepreneurship Terms
- EBIT: Earnings Before Interest and Taxes
- Financial Leverage: The amount of borrowed money used to finance operations and investments
- Operating Margin: It’s the profit a company makes on a dollar of sales after paying variable costs, but before paying any interest or taxes.
- Valuation Multiples: These are financial measurement tools that evaluate a business’s worth relative to its income statement, balance sheet, and cash flow statement values.
- Debt Covenant: These are restrictions that lenders put on lending agreements to limit the actions of the borrower.
Sources for More Information
- Investopedia – It’s a good resource for understanding financial concepts including LTM EBITDA. Their simple and comprehensive articles are beneficial for both beginners and professionals.
- CFA Institute – The website for the Chartered Financial Analyst (CFA) program, it’s a reliable resource for rigorous education regarding finance and investment concepts.
- NASDAQ – NASDAQ provides a comprehensive database of financial news, stock quotes, and more. You can get detailed information about LTM EBITDA and other financial metrics here.
- Morningstar – Morningstar offers a comprehensive view of the investment landscape including investor education articles that can help understand LTM EBITDA.
