How to Use LTM for Smarter Investment and Company Analysis

Investors and analysts often face a challenge when trying to measure a company’s recent financial performance. Traditional financial reports follow fiscal years, but businesses don’t operate within neat calendar cycles. Market trends, seasonal shifts, and unexpected events constantly impact financial results.

So, how can you evaluate a company’s true financial health at any given moment? This is where the Last Twelve Months (LTM) metric becomes essential. It provides a rolling view of a company’s financial performance, smoothing out fluctuations and offering a clearer, real-time picture.

What is LTM?

LTM, or Last Twelve Months, is a way to measure financial performance over the most recent 12 months, regardless of fiscal year reporting. It’s also commonly referred to as Trailing Twelve Months (TTM). Instead of being locked into a specific reporting period, LTM gives a more real-time view of how a business is performing.

For example, if a company’s fiscal year runs from January to December, but you want to check its performance in August, LTM would cover the period from September of the previous year to August of the current year. This rolling time frame allows for better decision-making, especially in industries affected by seasonal trends or sudden market shifts.

Why LTM Matters in Finance

LTM is valuable because it gives a clearer and more up-to-date picture of a company’s financial health. Since it isn’t tied to a set fiscal period, it removes distortions caused by quarterly fluctuations, special events, or seasonality.

For investors, LTM provides a better way to compare companies, even if they have different fiscal years. It helps in making smarter investment decisions by offering insights into revenue, earnings, and profitability trends over a relevant and recent time frame.

How to Calculate LTM

Basic Formula for LTM

LTM is calculated by taking the most recent four quarters of financial data and adding them together. If a company reports financials every quarter, you sum up the last four quarters to get the LTM value.

For example, if you want to calculate LTM revenue, the formula looks like this:

LTM Revenue = Most Recent 4 Quarters Revenue

Let’s say a company reports the following quarterly revenues:

• Q1: $5 million
• Q2: $6 million
• Q3: $7 million
• Q4: $8 million

To find LTM revenue, you simply add these together:

$5M + $6M + $7M + $8M = $26M (LTM Revenue)

This method works for various financial metrics like revenue, net income, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and EPS (Earnings Per Share).

Example Calculation of LTM Earnings Per Share (EPS)

Earnings Per Share (EPS) measures a company’s profit divided by the number of outstanding shares. LTM EPS is calculated the same way as revenue—by summing up the EPS from the last four quarters.

Let’s say a company reports the following EPS:

• Q1: $1.20
• Q2: $1.50
• Q3: $1.80
• Q4: $2.00

To find LTM EPS:

$1.20 + $1.50 + $1.80 + $2.00 = $6.50 (LTM EPS)

This calculation provides a more up-to-date view of a company’s earnings instead of relying on outdated annual reports. However, adjustments may be needed if there are accounting changes, stock splits, or one-time financial events.

Using the latest available data ensures accuracy and prevents misleading conclusions, making LTM an essential tool for financial analysis.

How LTM is Used in Financial Analysis

LTM vs. Fiscal Year Reporting

One of the biggest advantages of LTM is that it removes the rigid boundaries of fiscal year reporting. Companies report financials based on their fiscal year, which doesn’t always align with real-world events. For example, a retailer’s fiscal year might end in March, but its most important sales period happens during the holiday season in December. If an investor only looks at the company’s annual report, they might not see the full impact of those peak sales months.

LTM solves this problem by offering a rolling view of performance. It includes the most recent 12 months, regardless of fiscal year reporting, providing a better understanding of ongoing trends and recent growth.

LTM in Valuation Metrics

LTM is commonly used in financial valuation because it helps calculate important ratios like the price-to-earnings (P/E) ratio. The formula for P/E ratio is:

P/E Ratio = Stock Price / LTM EPS

Since stock prices change daily, it makes sense to use LTM earnings instead of outdated annual earnings. This ensures that valuation metrics reflect the company’s most recent financial performance.

Comparing Company Performance Using LTM

LTM is especially useful when comparing companies with different fiscal year-ends. Without LTM, investors might compare a company’s full-year performance to another company’s half-year results, leading to misleading conclusions.

For instance, if two competitors operate in the same industry but report earnings on different schedules, their financial statements may not be directly comparable. Using LTM ensures that investors compare apples to apples, making it easier to assess performance.

LTM in M&A (Mergers & Acquisitions)

When companies are being considered for acquisition, LTM is often used to evaluate their financial health. Acquirers don’t want to rely on outdated fiscal year reports—they need the latest data to make informed decisions.

By looking at LTM revenue, EBITDA, and profit margins, buyers can determine whether a company is stable, growing, or declining. It also helps assess whether the company’s recent success is sustainable or just a short-term spike.

LTM vs. Other Financial Metrics

LTM vs. TTM (Trailing Twelve Months)

LTM and TTM are often used interchangeably because they both represent financial performance over the past 12 months. However, some financial professionals prefer “LTM” for corporate earnings reports and “TTM” for investment analysis. In practice, they mean the same thing.

LTM vs. Forward-Looking Estimates

While LTM is useful for understanding past performance, it doesn’t predict the future. Investors often compare LTM data with forward-looking estimates to get a clearer picture of a company’s future earnings potential.

For example, if LTM earnings show a steady increase but analysts predict a slowdown due to market conditions, investors might reconsider their investment strategy. Combining LTM with forward-looking projections provides a more complete perspective.

LTM vs. Adjusted Earnings

Companies sometimes report “adjusted earnings,” which remove one-time events like asset sales or legal settlements. LTM captures real-world performance, but if major one-time events occurred, adjusted earnings may provide a more accurate representation of ongoing business operations.

Investors should be cautious when companies present adjusted earnings that differ significantly from LTM. If adjustments are frequent, it could indicate inconsistencies in financial reporting.

LTM and Seasonality: How It Helps Businesses

How LTM Smooths Out Seasonal Distortions

Many industries experience seasonal fluctuations. Retailers make most of their profits during the holiday season, tourism peaks in the summer, and agriculture follows planting and harvest cycles. If investors only look at a company’s latest quarter, they might see an artificial spike or drop in revenue.

LTM solves this issue by averaging financial performance over 12 months. This provides a more accurate picture of how the business is doing overall. Instead of being misled by a single quarter’s results, investors can see long-term trends.

For example, a ski resort’s revenue might be extremely high in winter but drop significantly in the summer. If an investor only looks at Q1 earnings, they might assume the company is highly profitable, but Q2 and Q3 might tell a different story. LTM balances these seasonal shifts, showing the company’s true financial health.

Consider a retailer that makes 50% of its annual revenue during the holiday shopping season. If an investor looks at Q4 alone, the company might seem like a fast-growing powerhouse. But what happens in the following months? LTM helps capture the full picture by including both the strong and weak quarters, giving a more balanced view of the company’s overall performance.

Common Mistakes When Using LTM

Ignoring Recent Trends

LTM provides historical data, but it doesn’t account for sudden shifts in business conditions. If a company is experiencing rapid growth or decline, LTM might not reflect those changes in real-time. Investors should always look at the latest available quarterly data to identify trends that LTM might overlook.

Not Adjusting for Accounting Changes

Companies sometimes change how they report financials, which can impact LTM calculations. If revenue recognition policies shift or expenses are reclassified, LTM figures might not be directly comparable to past performance. Analysts should be aware of such changes to avoid misinterpreting financial data.

Focusing Only on One Metric

LTM is a great tool, but it shouldn’t be used in isolation. Investors need to look at multiple financial indicators, including cash flow, debt levels, and future growth projections. A company might have strong LTM revenue but weak future prospects due to market saturation or increased competition.

When to Use LTM vs. Other Metrics

Best Use Cases for LTM

LTM is most useful when comparing companies with different fiscal years, analyzing businesses with seasonal revenue patterns, or evaluating key financial ratios like the P/E ratio.

Situations Where LTM is Less Useful

LTM may not be the best metric when a company has undergone major changes, such as restructuring, acquisitions, or new product launches. In such cases, recent quarterly performance might be more informative.

Combining LTM with Forward-Looking Data

To get a complete picture, LTM should be used alongside projections and forward-looking estimates. Investors should consider how a company is expected to perform in the future rather than relying solely on past performance.

Key Takeaways

LTM is a powerful financial metric that provides a more current view of a company’s performance than traditional fiscal-year reports. It eliminates distortions caused by seasonality and makes it easier to compare businesses on a level playing field.

However, LTM isn’t perfect. It doesn’t predict the future and can sometimes overlook major recent shifts in business conditions. That’s why investors should use LTM alongside other financial indicators to make smarter decisions.

Understanding LTM and how it fits into financial analysis can help businesses, investors, and analysts get a clearer picture of a company’s financial health and long-term potential.

FAQs

How does LTM help in stock market analysis?

LTM provides the most recent financial data, which is crucial for stock market analysis. Since stock prices change daily, using LTM earnings ensures that valuation ratios like P/E remain relevant. Investors prefer LTM because it smooths out one-time events and provides a clearer view of a company’s true earnings potential.

Can LTM be used for small businesses and startups?

Yes, but with caution. LTM is useful for analyzing trends in small businesses, but startups with rapid growth or inconsistent earnings might not get an accurate picture. Since new businesses often have fluctuating revenues, LTM may not fully reflect their future potential. In such cases, forward-looking metrics are also needed.

What are the limitations of LTM?

LTM looks at past performance, which may not reflect sudden market changes, economic downturns, or a company’s future growth potential. It also doesn’t account for business model shifts, restructuring, or acquisitions that can significantly impact financial results. Relying only on LTM can lead to outdated or misleading conclusions.

Is LTM used differently in different industries?

Yes, LTM is especially useful for industries with seasonal fluctuations like retail, tourism, and agriculture. In industries with steady revenues, such as utilities or healthcare, fiscal-year reporting might be sufficient. LTM is most effective when seasonality or recent trends need to be accounted for.

How does LTM impact financial forecasting?

LTM is a historical measure, so it doesn’t predict the future. However, it helps in forecasting by identifying trends and smoothing out temporary spikes or dips. Analysts often compare LTM data with projected earnings to determine whether a company’s growth is sustainable.