What Is Year-Over-Year (YOY)?
Year-over-year (YOY)-sometimes known as year-on-year is an often-used financial measure to evaluate the impact of two or more significant events in a year-to-year scale. 1 2 Monitoring YOY performance is a way to assess whether a company’s finances is growing, stagnant or declining. For instance, you could see within financial documents that a specific company has reported that its revenue up during the third quarter in a YOY perspective over the past three years.
Understanding Year-Over-Year Growth
Growth year-over-year compares a company’s current financial performance to the numbers from the same month a year prior. It’s considered to be more reliable than a comparison of month-to-month which typically reflects seasonal changes..
Common YOY benchmarks include quarterly and annual as well in monthly performance.
Benefits of YOY
YOY measurement facilitates cross-checking of the data sets. For the company’s revenue in the first quarter with YOY information analysts, finance analyst or investor can examine years of first-quarter revenue data to quickly determine if the company’s revenues are increasing or declining.
For instance, in 1st quarter in 2021 the Coca-Cola corporation posted an increase of 5 percent in its net revenue in the quarter that preceded it. When comparing similar months in various years one can make exact comparisons, regardless of the nature of seasonal consumer behaviour. 3 This comparison of YOY is also useful for portfolios of investments. Investors love to study the YOY performance in order to understand how it changes over time.
Reasoning Behind YOY
YOY-based comparisons are very popular when analysing a company’s performance since they can help reduce seasonality which can affect the performance of many companies. Profits, sales as well as other financial metrics fluctuate during different seasons of the year due to the fact that most businesses have peak seasons and a slow demand season.
For instance, retailers experience an extremely high demand period in the season of Christmas shopping which is in the final quarters of year. To accurately measure a company’s performance, there is sense to evaluate profit and revenue YoY.
It’s crucial to compare the performance of the fourth quarter for one year to the fourth quarter performance of other years. When investors look at the results of a retailer’s fourth quarter and compare them to the 3rd quarter results, it could seem like a company is experiencing extraordinary growth, but it’s seasonal, which is the reason for the variance in performance.
In a similar manner, when comparing the results between the 4th quarter to the next quarter it could appear to be an extreme drop, however this could be the due to seasonality.
YOY differs from sequential that compares the time from one month or quarter to the preceding one, and allows investors to view growth as linear. For example, the number of cell phones that a firm sold in the fourth quarter, compared to the third quarter, or the number of seats filled by airlines in January, compared to December.
Real-World Example
In the 2019 NASDAQ release, Kellogg Company released mixed results for the fourth quarter of 2018, which revealed that its YOY profits decreased even though sales increased in the wake of corporate acquisitions. Kellogg estimated that its adjusted earnings would decline by another 5-7% to 7% in 2019, as it continued to invest in alternative packaging formats and channels. 4
The company also announced plans to revamp it’s North America and Asia-Pacific segments and remove certain divisions from the former and reorganizing it into the division in Kellogg Asia, Middle East and Africa. Even though YOY profits were down however, its strong presence and ability to adapt to changing consumer patterns ensured that Kellogg’s outlook for the future was positive. 4
What Is YOY Used For?
The YOY method is used to create comparisons between one period as well as one year older. This permits an annualized comparison, for instance in the third-quarter results this year and. third-quarter earnings from the previous year. It is often used to measure a company’s growth in revenue or profits as well as be used to explain annual fluctuations in the country’s cash supply the gross domestic product (GDP), and other economic measures.
How Is YOY Calculated?
The calculations for YOY are easy and typically presented in percent terms. It involves using the value of the current year and dividing it by prior year’s amount and subtracting one (this year) / (last year) 1.
What’s the Difference Between YOY and YTD?
YOY is a measure of a twelve-month change. The Year-to-date (YTD) looks at changes in relation to the start of year (usually January. 1.).
What If I Am Interested in Comparisons for Less Than a Year?
It is possible to calculate month-over-month and quarter-over-quarter (Q/Q) in much similar fashion to YOY. In fact, you can select any period of time you like.
