What is Year-Over-Year (YOY)?
The financial comparison known as year-over-year (YOY) or year-on-year is often used to examine two or more quantifiable events annually. A company’s financial performance is improving, staying the same, or becoming worse based on its year-over-year performance. For instance, you can come across financial data stating that, year over year, over the previous three years, a particular company’s sales grew in the third quarter.
Understanding Year-Over-Year Growth
A company’s latest financial performance is compared to its figures from the same month last year to determine its year-over-year growth. This is more helpful than a month-to-month comparison, which often shows seasonal change.
Annual, quarterly, and monthly performance are common YOY comparisons.
YOY YOY measures have the advantage of making cross-referencing data sets easier. A financial analyst or investor may rapidly determine if a company’s revenue is rising or declining by comparing years’ worth of first-quarter sales data using year-over-year (YOY) data.
For instance, the Coca-Cola Company recorded a 5% rise in net sales in the first quarter of 2021 compared to the year before. Despite the seasonality of consumer behavior, comparing the same months in various years can yield valid comparisons. Investment portfolios also benefit from this year-over-year comparison. Investors like looking at year-to-year performance to observe how the market performs.
The rationale behind YOY
Year-over-year comparisons are often used in company performance analyses because they reduce the impact of seasonality, which affects most firms. Because most company sectors have a peak season and a low demand season, sales, profitability, and other financial measures fluctuate throughout the year.
For instance, during the Christmas shopping season, which occurs in the fourth quarter of the year, shops have a high-demand period. It makes it logical to compare sales and earnings year over year to assess a company’s success accurately.
It’s critical to evaluate one year’s fourth-quarter results relative to previous years. When comparing a retailer’s fourth-quarter statistics to the last quarter, investors may believe the firm is experiencing unparalleled growth. Still, in reality, seasonality is the primary factor determining the disparity in performance.
Similarly, there may be a sharp fall when comparing the fourth quarter to the first quarter of the following year, although seasonality may also be to blame for this.
Moreover, YOY is not the same as sequential, which compares a quarter or a month to the prior and shows investors linear development. For example, the number of smartphones sold by a tech business in the fourth quarter as opposed to the third, or the number of tickets booked by an airline in January as opposed to December,.
Real-Life Illustration
The Kellogg Company disclosed conflicting data for the fourth quarter of 2018 in a 2019 NASDAQ report, showing that even while sales rose due to corporate acquisitions, its year-over-year profitability dropped. As the company continued to invest in alternative channels and pack formats, Kellogg projected that adjusted profits would decline by an additional 5% to 7% in 2019.
The business also disclosed intentions to restructure its Asia-Pacific and North America businesses, splitting the latter into Kellogg Asia, Middle East, and Africa and eliminating specific units from the former. Even with declining year-over-year profitability, Kellogg’s overall outlook remained buoyant due to the company’s strong position and ability to adapt to consumer consumption patterns.
Why Are You Employed?
YOY is used when comparing one time period to another that occurred a year ago. Current enables an annualized comparison, for example, between the profits for the third quarter of the current year and previous quarters of the year. It may be used to explain annual variations in an economy’s money supply, GDP, and other economic metrics. It is often used to compare a company’s growth in earnings or sales.
How is YOY determined?
YoY calculations are simple and often given as a percentage. To do this, divide the value for the current year by the value for the previous year, then remove one: (current year) ÷ (previous year) – 1.
What Makes YTD and YOY Different From One Another?
YOY examines a 12-month shift. Year-to-date (YTD) measures the amount of change from the start of the year (often January 1). While YOY may be a reference point, YTD can provide a running total.
What Happens If I Want to Compare Things in Less Than a Year?
The computation of month-over-month or quarter-over-quarter (Q/Q) is similar to that of year-over-year (YOY). Yes, you are free to choose whatever time range you want.
Conclusion
- Year-over-year (YOY) analysis compares the outcomes of one period with those of a similar period on an annualized basis by analyzing two or more recorded events.
- A standard and helpful method for assessing a company’s financial success is comparing results annually.
- Investors use YOY reporting to assess a company’s financial performance.