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As the financial landscape continues to evolve rapidly, effective future planning in finance is crucial for individuals and organizations alike. With technological advancements bringing about unprecedented disruption in the financial sector, staying ahead of the curve and developing long-term strategies to weather storms is more important than ever.
One of the standard terms associated with finance future is NTM.
What Does NTM Mean in Finance?
In finance, “NTM” typically means “Next Twelve Months.” NTM refers to financial data or projections that pertain to the upcoming twelve-month period. Analysts and investors often use NTM figures to assess a company’s expected performance shortly.
NTM can be used in various financial contexts, such as earnings estimates, revenue projections, or valuation metrics. For example, NTM earnings per share (EPS) refers to a company’s expected earnings per share over the next twelve months.
By considering NTM figures, investors can gain insights into a company’s potential growth or profitability in the short term and make informed investment decisions. However, it is essential to note that NTM projections are based on estimates and assumptions, so they may be subject to change as new information becomes available.
NTM Example in Stocks Earning per share calculation
Company ABC is a publicly traded technology company. As an analyst, you’re interested in estimating its future profitability to make investment decisions. You focus on the company’s earnings per share (EPS) for the next twelve months (NTM).
Let’s say:
- ABC’s EPS for the past twelve months (LTM or Last Twelve Months) is $2.50.
- Over the past five years, ABC’s EPS has been growing at an average rate of 10% per year.
- You believe this growth rate is sustainable over the next year.
Using the NTM concept, you can forecast ABC’s EPS for the next year:
$2.50 (current EPS) * 1.10 (growth rate) = $2.75
So, you estimate ABC’s EPS for the NTM will be $2.75.
Investors and analysts then use this NTM forecast to compare with other companies and industry averages and calculate future valuation ratios, such as the forward P/E ratio. If the company’s current share price is $55, its forward P/E ratio would be $55/$2.75 = 20, meaning investors are willing to pay 20 times the company’s NTM earnings per share.
It’s important to note that forecasting future financials is a complex task and should consider various factors. This simple example doesn’t consider potential variations in growth rate, company-specific factors, market conditions, and other elements that could impact ABC’s EPS.
NTM EBITDA
EBITDA NTM represents adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for the next twelve months (NTM). EBITDA NTM allows investors and analysts to assess a company’s core profitability, irrespective of its capital structure, tax obligations, or non-cash expenses.
Calculation of EBITDA NTM
EBITDA NTM is derived by projecting a company’s EBITDA for the next twelve months based on financial forecasts or analyst estimates. EBITDA is calculated by taking a company’s net income and adding back interest expenses, taxes, depreciation, and amortization. The NTM component indicates that the metric is based on future expectations rather than historical financial data.
EBITDA NTM = EBITDA (Estimated Next Twelve Months)
Significance of EBITDA NTM
- Operational Profitability: EBITDA NTM provides insights into a company’s ability to generate profits from its core operations, excluding external factors such as interest payments, taxes, and non-cash expenses. It helps investors compare the operational performance of different companies within the same industry.
- Cash Flow Generation: EBITDA NTM is a proxy for a company’s cash flow potential. Excluding non-cash expenses like depreciation and amortization approximates the cash a business can generate from its operations.
- Comparability: EBITDA NTM allows for easy comparison between companies, irrespective of their capital structure or tax obligations. It helps to level the playing field when evaluating businesses with varying degrees of leverage or tax strategies.
- Valuation Tool: EBITDA NTM is frequently used in financial models and valuation techniques, such as the Enterprise Value (EV) to EBITDA multiple. This multiple determine a company’s value relative to its projected earnings.
Limitations of EBITDA NTM
While EBITDA NTM provides valuable insights, it is essential to be aware of its limitations:
- Excludes Important Factors: EBITDA NTM does not consider interest, taxes, or non-cash expenses. While this provides a clearer view of operational profitability, it overlooks essential aspects of a company’s financial health.
- Ignores Capital Expenditure: EBITDA NTM does not account for capital expenditures required to maintain or expand a company’s operations. Consequently, it may overstate a company’s cash flow generation potential.
- Industry Variations: Different industries have varying capital intensity, depreciation, and amortization levels. Comparing EBITDA NTM across industries without considering these factors can lead to misleading conclusions.
Enterprise Value to Next Twelve Months
The ratio EV/NTM refers to the valuation metric “Enterprise Value to Next Twelve Months.” Therefore, Enterprise Value measures a company’s total value, considering its market capitalization (equity value) and its outstanding debt estimated for the next twelve months (NTM).
Let’s break down the components of this ratio:
- Enterprise Value (EV): Enterprise Value is a measure of a company’s total value, considering its market capitalization (equity value) and outstanding debt. It would represent the theoretical takeover price if an acquirer were to buy the entire company. EV is calculated by adding the company’s market capitalization, debt, preferred equity, and minority interest while subtracting cash and cash equivalents.
- Next Twelve Months (NTM): NTM stands for “Next Twelve Months,” indicating a future period of twelve months from the present. In financial analysis, NTM is commonly used to project or estimate a company’s financial performance or valuation over the upcoming year.
By dividing a company’s Enterprise Value (EV) by its projected or estimated financial figures for the Next Twelve Months (NTM), the EV/NTM ratio provides a valuation measure relative to the expected future performance. It helps investors and analysts assess how the market values the company’s earnings or cash flow potential for the following year.
Let us see one practical example:
Enterprise Value (EV): $500 million. Next Twelve Months (NTM) Earnings: $50 million
Using these numbers, we can calculate the EV/NTM ratio as follows:
EV/NTM = EV / NTM Earnings = $500 million / $50 million = 10
In this example, the EV/NTM ratio for XYZ Inc. is 10. This means the company’s enterprise value is ten times the expected earnings for the next twelve months.
The EV/NTM ratio interpretation depends on the industry and the specific context of the company being analyzed. Generally, a lower EV/NTM ratio could indicate that the company is undervalued relative to its future expected performance, while a higher ratio may suggest overvaluation. However, when interpreting this ratio, it’s essential to consider other factors, such as industry benchmarks, growth prospects, and risk factors.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
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