What is the Last 12 Months (LTM) Reporting Method and Why Is It Important?
The last twelve months (LTM) reporting method is a financial report compiled on a company that reports its debts and equity over the 12 months prior to the report. It may be issued during the fiscal year and before the fiscal financial statements are filed by the company. This can be used as a substitute for year-end financial reports and give financial auditors and business assessors the most up-to-date financial data on a business.
LTMs are used to evaluate revenue growth, margins (e.g., gross, operating, net), sales and expenses, trends (e.g., gross income, net income, expenses), working capital management, key performance indicators (KPIs), and other financial metric indicators. It is also used to compare companies in the same industry.
How is the LTM calculated?
The LTM is calculated by compiling financial data from a company’s monthly, quarterly, and annual financial reports. If using an annual fiscal year-end report, the financial data for months not covered in the year-end report are replaced with data from the current year, and the older information is subtracted from the report.
For example, if you want to do the LTM for May 2022. You would use the year-end financial data from 2021 from May to December 2021, and then for the months January through April 2022, you would use the financial data from the quarterly, interim, and monthly financial reports issued by the company. Note, when compiling the LTM, you would have to remove the financial data for January to April 2021 from the 2021 fiscal year-end report before combining data from that report with the financial information from 2022.
Who uses the LTM?
LTM is used by people who want to assess the current financial health of a business. They may be interested in whether the business is growing, declining, or maintaining its current level of economic productivity. The LTM can give them this information without the assessment being influenced by seasonal sales, slow sales periods, or other things that may affect the business’ profitability and expenses. It also prevents the company’s financials under review from being unduly influenced by short-term sales boosts or a sudden drop in sales.
Furthermore, the LTM can be used to assess basic price fluctuations, how the business structure changes due to seasonal factors, and market trends that are affecting the company’s bottom line. The reviewers can also look at the LTM and suss out which of the company’s products/services have growing and declining sales, and have the greatest effect on the company’s income, expenses, and equity.
The people most interested in this information are bank loan officers, potential business partners, people considering buying the company, and anyone who wants to know the current value of the company (e.g., spouses, lawyers, in-house auditors, corporate planning personnel).
Why do some people prefer the LTM over a multi-year financial analysis?
The majority of business analysts prefer to review 5 to 6 years of a company’s financial performance. The multi-year financial analysis can tell you how a business has been doing over a period of years. However, it cannot tell you about the financial health of the business during the fiscal year, or its financial health if the business has not been in operation for several years. LTMs can be very useful for businesses that need to disclose their current financial health and need documentation to support it.
What are the disadvantages of the LTM?
LTMs are not perfect financial reporting instruments. Although they are useful, they do have their drawbacks.
Some drawbacks of LTMs are:
- They are tedious and time-consuming to compile because the people putting them together must work backwards. They are required to get old financial records, and then mix and match them so that they report on the 12 months prior to the LTM report.
- LTMs are of almost no value for businesses in volatile sectors like energy, technology, and commodities.
- This reporting method cannot be used if the business does not have a financial reporting system in place and is not compiling monthly, quarterly, interim, or annual financial reports. Although this can still be done if the business has accounting records and receipts that someone can go through, organize, and put into financial reports.
LTM is a financial reporting method that gives people an overview of the company’s financial health for the 12 months prior to the report. It can give an accurate, up-to-date status report on the company. Moreover, besides being used by external auditors, it can be used by internal staff to assess a company’s operations, do corporate planning, and compare corporate performance across the industry.
Given that this can be a tedious and time-consuming task that requires accountants to carefully review, sort, and compile reams of data, you may want to outsource this work to a professional service.
The Free Cash Flow (FCF) Agency has professional staff who can do an LTM report for you as well as do your required end-of-year financial documentation.