Year-over-year (YOY) can be defined as financial comparison or statistical change of two or more events to compare the result on an annualized basis. It calculates the percentage change during the past year (12 months). Year-over-year is considered an effective way of looking at growth for various reasons.
Firstly, it does not consider the seasonal effect. For example, your revenue from crops rose by 20% due to good weather and adequate rainfall.
Further, check it against the income from the last year (same month). It is also possible that your income will always rise this time of year. Although, if sales rise by 30% this time, then the revenue is down year-over-year.
Secondly, it recognizes long-term trends. Let say, your business is growing by 2% a month. But if it grew by 5% a month last year, it will be down when compared to year-over-year.
Hence, by using the YOY, one can find the growth for business performance indicators such as:
- Total employment
- Cost per acquisition
- Number of customers
Although, YOY can be positive, negative, or zero also indicates an increase, decrease or stagnate trend in the industry.
Pros of YOY
The pros of year-over-year are as:
- It does not recognize seasonality because it compares specific times only. For instance, retail statistics rise in New York during December due to the holiday season.
- Ease of calculation because it does not require any spreadsheet or complicated calculation.
- It states results in the percentage terms which make it easy to compare different sized companies, competitors, or industries.
- YOY calculation smooth out volatility throughout the year to compare the overall net results.
Cons of YOY
The cons of year-over-year are as:
- It will sometimes create a meaningless result if the growth is negative for any particular period.
- YOY will compare only full-year metrics due to which much more information is gather. It will lead to miss problems such as low growth rate, loss during any time, etc.
Alternative to YoY
After looking at some major cons of YOY, some alternatives can be taken place to analyze the growth rate more accurately. Some of them are:
- Month-over-Month (MOM) –
It measures growth change by comparing the difference between the values of two consecutive months.
2. Quarter-over-Quarter (QOQ) –
It measures the growth change by comparing the difference between the values of two consecutive quarters.
3. Year-to-Date (YTD) –
It measures the growth change from the beginning of the calendar year (January), until the present date.
4. Month-to-Date (MTD) –
It measures a certain metric from the beginning of the current month until the current date (but excluding today’s date)
5. Quarter-to-date (QTD) –
It measures a certain metric from the beginning of the current quarter until the current date (but excluding today’s date).
How to Calculate Year-Over-Year Growth Rate?
To calculate the year-over-year growth rate, you will require two-year numbers. Then below-mention steps are followed carefully as:
- Select the two data points you want to analyze – one from the examine period and another from 12 months prior.
- Subtract the previous year’s number from the current year’s number, which provides the total difference for the year. If the number is positive, it will indicate a year-over-year gain. Whereas, if the number is negative, it will represent the loss year-over-year.
- The above-obtained number will further divide by the previous year number which gives you the year-over-year growth rate.
- Multiple the YOY growth rate decimal figure obtained in step 3 by 100 to convert it into percentage format for your better understanding.
Mr. Govind is a manufacturer of the wooden chair. Last year (2019) he sold 200 chairs. This year (2020) he sold 220 chairs. Calculate year-over-year growth rate.
Step 1: Previous year number – Current year number
= 200 – 220
Step 2: Number Obtained / Previous year number
= 20 / 200
= o.1 or 10%
Hence, in the above illustration, Mr. Govind achieves a 10% of growth rate as compared to the same period last year YOY. This is a positive sign which indicates that the company is growing year-over-year.
YOY Financial Indicators
The most commonly used financial indicators for calculating the year-over-year growth are:
- Sales – It indicates that how much sales increased or decreased in a particular year. The negative rate indicates the down year-over-year and vice versa.
- Cost of Goods Sold (COGS) – It indicates how well the company has been able to manage its gross margin over a year.
- EBITDA – Earnings Before Interest Taxes Depreciation and Amortization measures operating profit and cash flow ( inflow and outflow )
- Net Income – It will calculate the earnings from the operation after reducing all the expenses.
- Earnings Per Share ( EPS ) – It will calculate the bottom line on a per-share basis.
YOY Economic Indicators
The most commonly used economic indicators for calculating the year-over-year growth are:
- Inflation – It denotes the trend in inflation i.e., a rise in the price in a particular year.
- GDP – Gross Domestic Product is the net sale of goods and services in the country.
- Interest Rate – It represents a rise or fall in the interest rate environment.
To conclude, Year-over-Year is a good financial tool to analyze the growth rate over a particular period. But still, it has some cons which are neither ignored nor accepted. One can choose various alternatives to YOY for better results.
In order to enable a comprehensive evaluation of any firm, the year-over-year growth analysis should be used in combination with other methods of analysis for better understanding.
Frequently Asked Question
YOY uses for making comparisons between one time period and another (previous year). It calculates the percentage change during the past year (12 months).
It is most commonly use to compare a company’s growth, profit, revenue and also use to describe the yearly change in an economy’s money supply, gross domestic product, employment rate, etc.
It can be calculated by using the formula –
Year-over-Year Growth = [(This Year – Last Year) / Last Year] * 100
YOY looks at 12 months (one year) change. Whereas, YTD (Year-to-Date) looks at a change-related beginning of the year (January).
The general benchmark companies should have on average is between 15% and 45%.