Business

Year-Over-Year (YOY): Definition and Financial Applications

What Is Year-Over-Year (YOY)?

The term year-over-year (YOY), sometimes known as year-on-year, is widely used in finance to compare two or more quantifiable events on an annually basis. YOY performance can be used to determine if a company’s financial performance is improving, remaining constant, or declining. For instance, financial records may say that a specific company’s third-quarter revenues increased year over year for the three years prior.

KEY TAKEAWAYS

  • The year-over-year (YOY) approach compares results from one period with those from a comparable period on an annualised basis. There are two or more measured events involved.
  • YOY comparisons are a popular and useful technique to assess a company’s financial performance.
  • Investors evaluate a company’s financial performance using YOY reporting.

Understanding Year-Over-Year Growth

A company’s latest financial performance is compared to its data for the same month a year ago to determine its year-over-year growth. When compared to a month-to-month comparison, which frequently reflects seasonal variations, this is thought to be more insightful.

It’s customary to compare YOY performance on an annual, quarterly, and monthly basis.

Advantages of YOY

YOY measures make it easier to compare different data sets. A financial analyst or investor can rapidly determine whether a company’s first-quarter revenue is increasing or declining by comparing years’ worth of first-quarter revenue data.

For instance, the Coca-Cola firm announced a 5% rise in net revenues for the first quarter of 2021 compared to the same period last year. Despite the seasonality of consumer behaviour, valid comparisons can be made by comparing the same months in various years.

[3] YOY comparisons are helpful for investment portfolios as well. Investors enjoy looking at year-over-year performance to observe how performance evolves over time.

Reasons behind the YOY

Because they reduce seasonality, a characteristic that can affect most organisations, YOY comparisons are preferred for evaluating a company’s success. Sales, profitability, and other financial metrics change over the course of the year since most business sectors have high and low seasons.

For instance, during the holiday shopping season, which occurs in the fourth quarter of the year, shops experience a boom in demand. To effectively assess a company’s performance, it makes sense to compare revenue and profits year over year.

The fourth quarter performance of one year must be compared to the fourth quarter performance of prior years. Investors may believe that a shop is seeing unheard-of growth if they compare its fourth-quarter earnings to those of the third quarter prior, but in reality, the difference is due to seasonality. Comparing the fourth quarter to the first quarter that follows may show a significant fall similar to this, although this might simply reflect seasonality.

The word sequential, which compares one quarter or month to the prior one and enables investors to monitor linear progress, varies from YOY in another way. An airline’s seat fill rate in January compared to December, or the amount of cell phones a tech company sold in the fourth quarter compared to the third quarter.

Real-World Example

For the fourth quarter of 2018, Kellogg Company provided mixed results in a 2019 NASDAQ report, stating that its YOY earnings continued to drop even though sales climbed as a result of corporate acquisitions. As it continued to invest in alternative channels and pack formats, Kellogg estimated that adjusted profitability would decline by a further 5% to 7% in 2019.

The company also revealed plans to separate the Asia-Pacific and North America areas into Kellogg Asia, Middle East, and Africa and eliminate a number of divisions from the former. Due to the company’s strong market position and responsiveness to changes in consumer consumption, Kellogg’s outlook remained favourable even if YOY earnings decreased.

What Is YOY Used For?

YOY is a comparison metric that is used to compare two time periods that are separated by one year. This enables comparisons on an annually basis, such as between the third quarter earnings this year and the third quarter earnings last year. It can also be used to characterise yearly changes in an economy’s money supply, gross domestic product (GDP), and other economic variables. It is frequently used to compare a company’s growth in earnings or revenue.

How Is YOY Determined?

YOY calculations are straightforward and frequently expressed as percentages. To do this, subtract one from the result after dividing the current year’s value by the prior year’s value: 1. minus (this year) (previous year).

What Sets the Year Over Year and Year to Date Apart?

Using YOY, a 12-month change is analysed. Year to date (YTD) analyses alterations since the start of the year (usually Jan. 1).

What Happens If I Have a Less Than Year-Long Interest in Comparisons?

Similar to YOY, you can calculate month-over-month or quarter-over-quarter (Q/Q). Indeed, you are free to select any time period.

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