Year-Over-Year (YOY)

What is YOY?

YOY is an abbreviation for “Year-over-Year”. In finance, economics, and other fields, YOY comparisons are used to evaluate changes in data from one period to the same period in the previous year. This performance comparison is a widely used method to evaluate the financial performance of a company as it can capture incremental improvements (or deteriorations) in the business performance.

Year-over-year has many uses: it can be used when looking at the financial statements (both quarterly and annual) and is particularly useful when analysing sales and profitability. It can also be used for valuation when looking at debt, share prices, market caps and valuation metrics.

Year-Over-Year Definition

Year-over-year is a growth calculation commonly used in economic and finance circles. Comparing how a variable does from one year to the next is an important way for a company to know whether certain areas of its business are growing or slowing down. One advantage of a year-over-year measurement is that it smooths out fluctuations that may occur monthly.

For example, many retail companies see an uptick in sales in November and December during the Holiday season. If a company reported a 35% increase in revenue in December versus November, the data would provide less insight than a report showing that revenue increased 20% in the most recent December period versus last year. The year-over-year measure indicates revenue is growing on a yearly basis rather than just for the holiday season.

Why is YOY so Important?

There are a number of reasons YOY growth is so important to take into account. Year-over-year calculations can be used to primarily measure performance while allowing for seasonal context. It is also useful for spotting errors.

Measuring Performance

Using year-over-year calculations can help measure a business’s performance. Analysts can see if the business is growing from year to year, not just month to month. It is helpful to spot long-term trends and if a business is improving over time.

It is important to check the base and most recent period to ensure that the same areas are being measured. For instance, if a company made a small acquisition, this could likely contribute to the YOY growth for the following period. Skilled analysts will be able to ‘strip out’ this acquisitional growth and compare the YOY performance of the underlying business.

By measuring multiple business performance areas, investors can see what is working well and what is not. If something is not working, a business may need to cut expenses or make other changes to improve performance. For example, your cost per acquisition year-over-year might be better for Product A but not Product B.

YOY growth can be used to analyze long-term trends. Let’s assume a mature company’s sales typically grow at 4% pa (YOY). If the latest reported figures show that this has slowed to 3.5% YOY it will suggest that if growth has slipped from the annual target and if it continues to slow there may be an issue.

Seasonality Context

YOY calculations are particularly good for businesses with seasonal peaks. For example, greenhouses sales might peak in the spring and summer (when gardeners want somewhere to cultivate plants) while a retail business might peak in November and December (Holiday season). If analysts were to look at annual sales on a dollar basis it would be hard to work out if the ‘busy’ season had been better or worse than the previous year.

The YOY growth rate smooths out any monthly volatility. Instead of seeing large increases and decreases between seasonal months, analysts can compare the current business figures to the same time last year.

This type of analysis will help detect:

• If a business is doing better than last month but is actually lower compared to last year
• If it is doing worse than last month but up from where it was versus the previous year

Investors will often keenly wait for monthly or quarterly sales figures to be released – these tend to be released by companies or third parties ahead of financial results. Any early indications that performance has been ahead or below expectations versus last year will provoke a reaction from the markets. This can be either sector-wide or suggest a company specific issue. If sales or traffic figures are low YOY then companies may well deliver profits below market expectations.

Spotting Errors

Doing a year-over-year analysis might help analysts find errors and discrepancies in the company books. If there are big increases or decreases from last year, it is likely that something might have incorrectly recorded something. Examining several time periods year-over-year can help narrow down when the error may have been made. This is also a useful exercise during periods of M&A as business divisions may have changed shape so new comparison figures will need to be calculated.

How To Calculate Year-Over-Year Percentage Growth

YOY Percentage Formula

To calculate the year-over-year percentage change, analysts can use the following formula, new value minus old value, divided by old value, multiplied by 100.

Year-over-year percentage change is calculated by subtracting old value from new value, divided it by old value, multiplied by 100. For example, if revenue last year was $100,000 and this year it is $120,000, the year-on-year percentage change would be:

What is a Good YOY Growth Rate?

A good Year-over-Year (YOY) growth rate can vary depending on the industry and the specific context of the business. Generally, a YOY growth rate of 10-20% is considered healthy for most industries. However, high-growth sectors like technology might aim for higher rates, while more mature industries might see lower rates as acceptable.

Limitations of Year-over-Year:

There are several limitations of YOY analysis which are important to recognise when evaluating company performance. These include:

Short-term Fluctuations: YOY analysis cannot usually account for short-term fluctuations, which might be important for understanding immediate trends within the market. If there has been a very short-term market reaction to an event, it may be difficult to quantify in quarterly or annual YOY figures. Analysts will have to investigate further to try and quantify the impact of such events.

Startups: YOY analysis is ineffective for startups or businesses with less than 13 months of operation, where shorter monthly or quarterly metrics are preferable. When a company is starting from zero or extremely low sales, the year-over-year improvement will typically look extremely large (e.g. 1,476%) as it is comparing growth from a very low base figure. Looking at weekly sales growth can be more helpful in this scenario. It can also be more useful to examine the type of sales taking place and the customers to gain better insights into the business. Once the business has reached regular sales then YOY comparisons start to become effective.

Seasonality: While YOY can smooth out seasonal variations, it might not capture the nuances of intra-year changes. For instance, if there is a period of extremely cold weather in Q4 we can expect sales of warm clothes and use of electricity to spike. If this cold spell is the base period of comparison, it will likely make any growth analysis look very disappointing as the most recent sales of warm clothes and electricity will be relatively low. In reality, the base period has simply benefited from seasonality. Analysts need to be cautious of this as seasonal ‘bumps’ can great very attractive YOY growth figures such as a boom in cold weather clothing sales. However, it will also create a ‘high base effect’ as future growth will look small (or negative) in percentage terms.

Accounting for this is important when looking at retail companies, particularly those with cyclical sales which are also exposed to the effects of seasonality.

What’s The Difference Between YOY And YTD?

YOY (Year-over-year) looks at the 12-month change in a figure and compares the same period in successive years. For instance, the Q3 quarter figures (July to September) would be compared to Q3 in the previous year.

YTD (Year-to-Date) figures look at the change relative to the beginning of the year (usually January 1) up to the most recent date. YTD figures are cumulative, so when February figures are released, they will be added to January’s initial figures and so on. Each month (or time period) would be added to the existing data for the year.

YTD figures can be compared YOY to look at the growth versus the previous year as long as both YTD figures are for the same time period.

Year-over-Year (YOY) Example

Here is an example of YOY calculations. Let’s assume the net operating income for a property was $150,000 last year. The previous year, net operating income was $95,000.  We can calculate the YOY growth by using the growth formula. Take $150,000 net operating income and subtract the previous year’s NOI of $95,000, then divide the result by $95,000 (the underlying base period). In this case, that would be ($150,000 – $95,000) / $95,000. This gives YOY growth of 57.8%.

The YOY formula can also be used to calculate the dollar amount of growth or the current or previous values. For example, if the average rent in a particular geographic area is currently $1,100 and YoY growth was reported as 10%, then we can calculate that last year the average rent was $1,100 / (1 + 10%), or 1,000.

Download a further example in Excel looking at both annual and quarterly YOY figures.

Advantages and Disadvantages of YOY Analysis

Advantages of Year-over-Year Growth

• Assists business strategy by providing a comprehensive view of growth
• Can highlight issues related to production efficiency, overhead, and expansion costs
• Offers valuable information for lenders, banks, and decisionmakers
• Provides a more accurate picture of seasonality for seasonal businesses
• Helps identify negative trends that may affect long-term growth

Disadvantages of Year-Over-Year Growth

• Cannot account for short-term fluctuations
• Ineffective for startups or businesses with less than 13 months of operation, where monthly or quarterly metrics are preferable
• Analysts using this method must be aware of whether the ‘base’ period being used has any unusual events included in the figure (and the same for the new period) as this can distort results

Use of YOY Analysis

To assess a company’s overall health and performance, it is crucial to consider long-term, holistic factors and not just rely on quarter-over-quarter performance, which can be misleading due to seasonal variations.

To get an accurate picture, analysts should consider industry cycles and compare sales over time. For example, comparing winter boot sales from different winter seasons in a shoe store instead of summer sales is a vital exercise to look at growth. YOY figures may appear to be declining but quarter-on-quarter figures may not show this.

To identify abnormal behavior and trends, it is important to analyze major fluctuations in metrics. While comparing quarter-over-quarter can reveal seasonal trends, fluctuations that occur year-over-year may warrant closer examination. For instance, a significant decrease in sales due to a new sales strategy could indicate a need to re-evaluate the approach. However, if a similar spike or drop happened in the previous year, it may not be a cause for alarm.

Conclusion

YOY analysis is a powerful tool for evaluating a company’s growth and performance over time. By comparing current data with data from previous years, businesses can get a more accurate picture of their progress, identify trends and issues, and make informed decisions about their future. While YOY analysis has some limitations, it can be a valuable resource for businesses looking to grow and succeed in the long term.