Year-over-year (YOY), also written as year-on-year, is a standard method of comparing two or more measurable events annually in finance. The growth or decline of a company’s bottom line can be estimated by comparing results from one year to the next. For instance, the third-quarter revenues of a specific company may have increased year over year for the preceding three years, as reported in the company’s financial reports.
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Gaining an Understanding of Annualized Development (YOY)
A company’s year-over-year growth rate is calculated by comparing its most recent monthly financial results to those from the same month a year ago. This is more illuminating than looking at monthly averages, which seasonal fluctuations can skew.
Annual, quarterly, and monthly results are all commonly compared YOY.
Examples of Year-Over-Year (YOY)
The company’s 2018 revenue was $110 million, up from $100 million in 2017. The increase of $10 million contributed to a 10% year-over-year (YoY) rise in revenue.
Compared to the previous year, another company’s fourth-quarter earnings were $50 million in 2018. This was down from $100 million in the prior year’s fourth quarter. To put it another way, income dropped by half from the previous year.
Here’s one way in which Facebook’s bottom line evolved in 2018 compared to the previous year:
| 2017 | 2018 | YOY | |
| Revenue | $39,942 | $55,013 | 38% |
| Operating Income | $20,203 | $24,913 | 23% |
| Net Income | $15,934 | $22,112 | 39% |
Quarterly financials are often compared year-over-year (YoY) to see if there was an improvement or a decline from the previous year’s period.
Revenue for Tesla (TSLA) rose from $4,226 million in Q4 2018 to $4,384 million in Q1 2019. That’s an increase of 2.1% when compared to the previous year.
Comparing quarterly financials to the same quarter the previous year is helpful because it smooths out the numbers by removing seasonal fluctuations.
Comparing a store’s sales from the third to the fourth quarter might lead one to believe that the fourth quarter was particularly productive for the business. However, the holiday season falls within this quarter, which usually results in brisk business.
This highlights the importance of comparing quarterly financials on a year-over-year basis. You can see clearly if the trend is upwards or downwards.
How to Calculate YoY Growth (Step-by-Step)
The following formula can determine how fast an economy expands from one year to the next.
Year over Year Growth (YoY)
= ((Current Period Value ÷ Prior Period Value) – 1)/100
YOY Growth Calculation Example
Assuming a 15% increase in revenue from Year 0 to Year 1, the YOY growth rate would be calculated as follows:
YOY growth = ($20 million / $15 million) – 1 = 33.33%
YoY growth can also be calculated by subtracting the ending balance from the ending balance in the current period and then dividing that result by the ending ratio in the previous period.
YOY growth = ($20 million – $15 million) / $15 million = 33.33%
Under both methods, the difference between the two time periods expressed as a year-over-year growth rate totals 33.33 percent.
How to Interpret YOY Variance (Percent Change)
The primary advantage of YOY growth analysis is that it is simple to monitor and compare growth rates across multiple periods. This benefit is amplified when the rates are annualized, as monthly volatility is mitigated.
Additionally, if the past results represent a complete economic cycle, any cyclical patterns will become apparent.
While you can get a feel for the two rules with little effort, you’ll need to dig deeper into the company’s growth trajectory to pinpoint the fundamental causes of the shift before drawing any firm conclusions.
Increased YOY Growth → Positive
Decreased YOY Growth → Negative
A quick illustration: say a company’s revenue grew by 5% last year but is only expected to grow by 3% this year.
Despite the slightly slower growth rate, the revenue quality could have been enhanced by implementing measures such as long-term contractual revenues, less churn, and lower customer acquisition costs.
The main advantage of YoY growth analysis is that it makes it simple to monitor and compare the growth rates over multiple time intervals and that, if annualized, it eliminates the impact of monthly volatility.
Moreover, if the past results represent a complete economic cycle, any cyclical patterns will become apparent.
While you can get a feel for the two rules with little effort, you’ll need to dig deeper into the company’s growth trajectory to pinpoint the fundamental causes of the shift before drawing any firm conclusions.
Annualized growth rate increases are viewed favorably.
Declining Year-Over-Year Growth Unfavorable
As a quick illustration, imagine a company whose revenue grew by 5% last year but is only expected to grow by 3% this year.
Despite the slightly slower growth rate, the revenue quality could have been enhanced in several ways.
Without conducting a more in-depth analysis, concluding that the current year was inherently “worse” than the previous year would be wrong.
The fact that all businesses experience a slowdown in growth rate is a further factor to consider.
Companies that already have a sizable share of the market are less likely to invest in expansion and more likely to put their resources toward:
- Shareholder dividends
- Efficiency Gains in Operations
- Maintaining Your Current Client Base vs. Recruiting New Ones
Benefits of YOY
Year-over-year comparisons make it easier to examine data from different periods. Revenue growth or decline can be quickly determined by comparing first-quarter numbers from additional years using year-over-year (YOY) data.
Coca-Cola, Inc., for instance, reported a 5% year-over-year increase in net revenues during the first quarter of 2021. Despite the cyclical nature of consumer behavior, reliable comparisons can be made by comparing the same months across years. Portfolios can benefit from this year-over-year analysis as well. Investors look at year-over-year comparisons to get a feel for the trends.
Common YOY Financial Metrics
The most popular financial metrics for comparing one fiscal year to the next are as follows:
- Sales revenue: how much bigger or smaller are annual increases or decreases in sales?
- Cost of Goods Sold (COGS): how successfully has the business managed its gross margin?
- Selling General & Administrative Expenses (SG&A): how well have top-level managers handled the costs of running the company office?
- Earnings Before Interest Taxes Depreciation and Amortization (EBITDA): a metric for assessing operational success that can be used as a surrogate for cash flow.
- Net income: examining the company’s financial results from one period to another.
- Earnings Per Share (EPS): analyzing the bottom line from a per-share perspective.
Common YOY Economic Indicators
To make a reliable comparison between the two time periods, here is a rundown of the most popular metrics that are used:
Inflation: which way is inflation moving?
Unemployment rates: how has the workforce participation rate changed compared to previous years?
GDP: to what extent does a nation’s output contribute to the world’s total GDP?
Interest rates: are interest rates expected to continue to rise or fall in the foreseeable future?
Alternatives for Year-over-Year Comparisons
Some time series data may be more interesting to an analyst than others to compare year over year, such as:
- Month-over-Month
- Quarter-over-Quarter
- Year-to-date
- Compound growth rates
Conclusion
Companies’ growth or decline can often be easily discerned by comparing their performance from year to year.
Investing in a growing company’s stock is preferable because the company’s revenue and earnings will likely increase over time, driving up the stock price.
However, when a company’s revenue and earnings fall, the stock price typically falls significantly.
FAQs
YoY analysis is useful for comparing the performance of a business to that of its competitors because it eliminates the effects of seasonality and provides a clearer picture of how the company performs in comparison to others in the same industry. In contrast, QoQ analysis is more useful for determining a business’s rate of growth or decline.
Common mistakes to avoid in YoY analysis include failing to define clear objectives, ignoring important factors, relying only on the mean, or using a biased sample, failing to comprehend the problem, applying the incorrect evaluation technique, and insufficient information gathering.
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Source: CFI, Investopedia, StockAnalysis