Trailing twelve month ebitda

What Is Trailing twelve month ebitda?

Trailing twelve month EBITDA (TTM EBITDA) is a financial metric representing a company's earnings before interest, taxes, depreciation, and amortization over the most recent 12-month period. It falls under the broader category of financial analysis and is frequently used to assess a company's operational profitability and generate a clearer picture of its core business performance. By normalizing the reporting period to a continuous 12 months, TTM EBITDA offers a consistent view of performance, regardless of fiscal year ends or quarterly fluctuations. This metric is a popular alternative to net income for evaluating a company's ability to generate cash from its ongoing operations, before the effects of financing, accounting, and tax decisions. Analysts often rely on TTM EBITDA when comparing companies within the same industry, as it helps neutralize the impact of varying capital structures and non-cash expenses.

History and Origin

While "trailing twelve month" refers to a specific reporting period, the underlying metric, EBITDA, has a notable history. The concept of EBITDA gained prominence in the 1970s, largely popularized by American media billionaire John Malone. He reportedly developed EBITDA as a tool to evaluate the cash flow generation capabilities of capital-intensive telecommunications companies. Malone advocated for its use over traditional metrics like earnings per share (EPS), arguing that EBITDA offered a more accurate reflection of financial performance for high-growth businesses requiring significant infrastructure investment. Its widespread adoption solidified during the leveraged buyout (LBO) boom of the 1980s, where firms used EBITDA to gauge a target company's ability to service the substantial debt used to finance these deals.⁵

Key Takeaways

Standardized Period: Trailing twelve month EBITDA always covers the most recent 12-month period, offering a continuous and up-to-date view of operational performance.
Operational Focus: It strips out non-operating expenses such as interest and taxes, and non-cash expenses like depreciation and amortization, to highlight core business profitability.
Comparability: TTM EBITDA is particularly useful for comparing companies with different capital structures or accounting policies, facilitating an "apples-to-apples" comparison.
Non-GAAP Metric: TTM EBITDA is not recognized under Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), meaning companies have flexibility in its calculation, which can lead to inconsistencies.

Formula and Calculation

The formula for calculating Trailing twelve month EBITDA typically starts with a company's operating income (also known as EBIT) and then adds back depreciation and amortization expenses. Alternatively, it can be derived from net income by adding back interest, taxes, depreciation, and amortization for the most recent 12 months.

To calculate TTM EBITDA:

\text{TTM EBITDA} = \text{Operating Income (EBIT) for TTM} + \text{Depreciation for TTM} + \text{Amortization for TTM}

Alternatively:

\text{TTM EBITDA} = \text{Net Income for TTM} + \text{Interest Expense for TTM} + \text{Taxes for TTM} + \text{Depreciation for TTM} + \text{Amortization for TTM}

Where:

Operating Income (EBIT): Earnings before interest and taxes. This is found on the income statement.
Net Income: The profit remaining after all expenses, including taxes and interest, have been deducted. Also found on the income statement.
Interest Expense: The cost of borrowing money.
Taxes: Corporate income taxes.
Depreciation: The expense of allocating the cost of tangible assets over their useful lives.
Amortization: The expense of allocating the cost of intangible assets over their useful lives.
All components for the calculation are typically found within a company's financial statements, specifically the income statement and sometimes the notes to the financial statements or cash flow statement for depreciation and amortization figures.

Interpreting the Trailing twelve month ebitda

Interpreting Trailing twelve month EBITDA involves understanding what it aims to represent and its inherent limitations. A higher TTM EBITDA generally indicates stronger operational performance and greater capacity to generate cash from core business activities. It is often used as a proxy for a company's operating cash flow before considering its financing decisions or tax obligations.

When evaluating TTM EBITDA, analysts often compare it to previous periods for the same company to identify trends in operational efficiency. A rising TTM EBITDA suggests improving core performance, while a declining trend might signal operational challenges. Furthermore, it is commonly used in valuation multiples, such as Enterprise Value (EV) to TTM EBITDA, to assess how a company's total value compares to its operational earnings. This allows for cross-company and cross-industry comparisons by neutralizing the impact of different capital structures and tax rates.

Hypothetical Example

Consider "InnovateTech Solutions," a software company, and its financial performance over the most recent 12 months.

InnovateTech Solutions (TTM Financial Data):

Revenue: $500,000,000
Cost of Goods Sold: $150,000,000
Operating Expenses (excluding D&A): $200,000,000
Depreciation: $25,000,000
Amortization: $15,000,000
Interest Expense: $10,000,000
Taxes: $5,000,000
Net Income: $95,000,000

To calculate InnovateTech's TTM EBITDA:

Calculate Operating Income (EBIT):
Revenue - Cost of Goods Sold - Operating Expenses = Operating Income
$500,000,000 - $150,000,000 - $200,000,000 = $150,000,000
Add back Depreciation and Amortization to Operating Income:
TTM EBITDA = Operating Income + Depreciation + Amortization
TTM EBITDA = $150,000,000 + $25,000,000 + $15,000,000
TTM EBITDA = $190,000,000

Alternatively, starting from Net Income:

TTM EBITDA = Net Income + Interest Expense + Taxes + Depreciation + Amortization
TTM EBITDA = $95,000,000 + $10,000,000 + $5,000,000 + $25,000,000 + $15,000,000
TTM EBITDA = $190,000,000

InnovateTech's TTM EBITDA of $190,000,000 suggests a strong operational cash-generating capability before considering its financing costs or the capital investments reflected by depreciation and amortization on its balance sheet.

Practical Applications

Trailing twelve month EBITDA is a widely used metric across various financial contexts due to its focus on core operational performance.

Mergers and Acquisitions (M&A): TTM EBITDA is a key metric in valuing target companies for acquisition. It provides a standardized basis for comparison between potential targets, as it removes the effects of different financing structures and accounting policies. For example, specific M&A agreements may define earn-out targets based on a company's Adjusted EBITDA for a particular trailing twelve-month period.
Credit Analysis and Lending: Lenders often use TTM EBITDA to assess a borrower's capacity to service debt and repay loans. It provides a measure of operational cash flow available before debt obligations. Financial covenants in loan agreements frequently include ratios based on TTM EBITDA, such as Debt/TTM EBITDA or TTM EBITDA/Interest Expense, to ensure the borrower maintains certain financial health benchmarks. Public filings often contain reconciliations of TTM EBITDA used in credit facilities to GAAP net income.⁴
Equity Valuation: Investors and analysts use TTM EBITDA in conjunction with Enterprise Value (EV) to calculate the EV/EBITDA multiple. This multiple is a common valuation tool, especially for comparing companies in the same industry, regardless of their capital structure.
Performance Benchmarking: TTM EBITDA helps companies benchmark their operational efficiency against competitors. By focusing solely on pre-financing and pre-tax earnings, it allows for a cleaner comparison of how effectively different companies generate profits from their primary business activities.

Limitations and Criticisms

While Trailing twelve month EBITDA provides valuable insights into operational performance, it has several limitations and faces significant criticism:

Ignores Capital Expenditures: One of the most common critiques is that EBITDA, and by extension TTM EBITDA, ignores capital expenditures (CapEx), which are crucial for maintaining and growing a business, particularly in capital-intensive industries. By adding back depreciation and amortization, it can create a misleading impression that capital assets are "free" or that funds are available for distribution when they are needed for reinvestment.³ This can overstate a company's actual cash flow.
Excludes Interest and Taxes: While useful for comparison, excluding interest expense overlooks the real cost of financing, which is a significant obligation for leveraged companies. Similarly, ignoring taxes can misrepresent the actual cash available to shareholders, as taxes are a mandatory outflow.
Non-GAAP Metric: Since TTM EBITDA is a non-GAAP measure, its calculation can vary between companies. This lack of standardization means that companies can define and adjust it in ways that may present a more favorable financial picture, potentially leading to a lack of comparability or even manipulation.²
Ignores Working Capital Changes: TTM EBITDA does not account for changes in working capital, which can significantly impact a company's cash flow. A company might have high EBITDA but still face liquidity issues if it experiences substantial increases in accounts receivable or inventory.¹

Trailing twelve month ebitda vs. EBITDA

The primary distinction between Trailing twelve month EBITDA and EBITDA lies in the reporting period.

EBITDA refers to Earnings Before Interest, Taxes, Depreciation, and Amortization for any specified period. This could be a single quarter, a fiscal year, or a projected future period. When a company simply states "EBITDA" without specifying a timeframe, it often refers to the most recently reported fiscal year or quarter.
Trailing twelve month EBITDA (TTM EBITDA) specifically refers to the sum of EBITDA for the most recent four consecutive fiscal quarters, or the last 12 months of operations. This provides a rolling, continuous view of performance that smooths out seasonal variations and offers a more current perspective than a single annual report that might be several months old.

In essence, TTM EBITDA is a specific application of the broader EBITDA metric, ensuring the data reflects the most recent 12-month operational period. Analysts use TTM EBITDA to gain a more current and consistent understanding of a company's ongoing operational profitability.

FAQs

Why is TTM EBITDA often used in company valuation?

TTM EBITDA is frequently used in valuation because it helps standardize comparisons between different companies. By removing the effects of diverse capital structures, tax policies, and non-cash accounting entries like depreciation and amortization, it focuses on the operational profitability that can be directly compared across businesses, regardless of how they are financed or structured.

Is Trailing twelve month EBITDA a GAAP measure?

No, Trailing twelve month EBITDA, like EBITDA itself, is a non-GAAP (Generally Accepted Accounting Principles) measure. This means it is not defined or regulated by accounting standards bodies, allowing companies some flexibility in how they calculate and present it. Users should always look for a reconciliation of TTM EBITDA to the most comparable GAAP measure, such as net income.

Can TTM EBITDA be negative?

Yes, TTM EBITDA can be negative. While it aims to capture operational profitability, if a company's core operations are losing money, or if its revenues are not sufficient to cover its operating expenses (before interest, taxes, depreciation, and amortization), the TTM EBITDA figure will be negative. A negative TTM EBITDA signals significant operational challenges.

How does TTM EBITDA relate to cash flow?

TTM EBITDA is often considered a rough proxy for a company's operating cash flow. It estimates the cash generated from operations before considering how the company is financed, taxed, or the need to replace existing assets. However, it is not a direct measure of cash flow as it does not account for changes in working capital, capital expenditures, or actual cash taxes and interest payments. For a more complete picture of cash flow, analysts examine the cash flow statement.