The year over year calculation is a great way to compare how a company is performing on an annualized basis.
What is Year Over Year (YOY)
Year over- year (YOY) is a method that is often used when making financial comparisons. It can also be described as a mathematical procedure of evaluating a statistic for one period to the same time-frame from the preceding year. For instance, the first quarter of 2018 compared to the first quarter of 2019.
YOY evaluations are a renowned and valuable gauge to determine the economic efficiency of a firm as well as investments. Measurable events that recur every year can be contrasted on a YOY basis. Regular reviews include monthly, quarterly, and annual performance.
- Counters seasonality because YOY calculates precise durations
- Evens out volatility all through the year to review net outcomes
- Easy to analyze because financial calculators or spreadsheets are not necessities
- Indicates results in terms of percentages for an effortless evaluation across companies that have different sizes
Below is a hypothetical example of how YOY works:
On the assumption that Company AB’s fiscal year started on June 1 and that today is August 31, the following could have been recorded:
Through a comparison of the revenues of 2017 and 2016, Company AB was up 20% YOY.
Calculating YOY Growth
You can simply obtain results by using the details on your balance sheet. The following are crucial steps that you can undertake:
Step 1: Select what you desire to measure as well as the period for evaluation. More often than not, you will assess revenue. However, any measurable event that recurs annually can be used.
Step 2: To begin the equation, subtract the previous year’s number from the current one’s value. By doing so, you will get the sum difference for the year. If the result is positive, it suggests a gain, and if it is negative, you incurred a loss.
Step 3: Divide the variation by the last year’s figure. In this case, you obtain the YOY growth rate.
Step 4: Multiply the value by 100 to convert your outcome to a proportion. This helps in acquiring the YOY percentage change.
Therefore, the YOY growth formula is given as follows:
|Year-over-year Growth = [(Current Year – Previous Year) / Previous Year] 100|
As indicated in The Balance there are three top economic indicators to do YOY calculations:
- Long-lasting goods: It is essential to highlight that the Commerce Department documents this statistic from one month to another.
Note: YOY calculations depicted a warning of the Great Recession from the onset of October 2006.
- Manufacturing jobs: The United States was already losing these positions on a monthly basis for several years. However, when employment started decreasing YOY in 2007, an impending recession was hinted.
- Gross Domestic Product (GDP): This is an indicator of the pace at which the economy develops. The Bureau of Economic Analysis (BEA) assesses the extent to which the country’s economy would produce for a whole year in the event that it continued progressing at the same rate. Therefore, the BEA simplifies your task of conducting a YOY evaluation with the preceding years of GDP growth.
Logic behind Year-Over-Year
The popularity of analyzing an enterprise’s performance is enhanced since YOY comparisons aid in mitigating seasonality, which is an aspect that can affect many businesses. Fiscal metrics such as profits and sales fluctuate during different times of the year. In view of that, a majority of commercial lines have a low and peak season.
For example, the holiday shopping phase falls in a year’s fourth quarter. During that time, retailers enjoy a peak demand period.
In order to appropriately quantify a corporation’s performance, it is fundamental to compare profits and revenue year-over-year.
If an investor examines the results of a retailer in the fourth quarter against the previous third quarter, it may seem a company is going through unparalleled growth. Nonetheless, it is seasonality that is impacting the results’ differences.
- YOY assesses the performance of your business.
- The YOY growth rate reveals the percentage variation from the previous 12 months.