YoY (Year-Over-Year) – What is it?
YoY (year-over-year) analysis compares one period to the same period the previous year for metrics like revenue, earnings, growth & inflation.
Year-Over-Year (YOY) is frequently used as a financial comparison for two or more measurable values on an annualized basis. YOY analysis allows investors to quickly gauge if a company’s financial performance is getting better, worse, or remaining static.
For example, in financial reports, you may read that a particular business reported its earnings increased for the previous quarter, on a YOY basis, for five straight years.
YOY (Year-Over-Year) A Closer Look
YoY or Year-over-year comparisons are an effective way to evaluate the financial performance of a company as well as stocks and investments. Any measurable value that repeats annually can be compared on a YOY basis. Common YOY comparisons include annual, quarterly, and monthly performance.
YoY financial metrics
Here is a list of the most commonly used financial metrics for conducting a year-over-year comparison:
- Revenue – how much have sales increased or decreased year over year
- Cost of Goods Sold (COGS) – how well has the company been able to manage its gross margin
- Selling General & Administrative expense (SG&A) – how well have executives managed their corporate office expenses
- Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) – a measure of operating profit and a proxy for cash flow
- Net Income – comparing the bottom line of the business over time
- Earnings Per Share (EPS) – looking at the bottom line on a per-share basis
YoY economic indicators
YoY comparisons are also used for comparing broad economic indications. Here is a list of the most commonly used macro-economic metrics for year-over-year comparisons:
- Inflation – what is the trend in inflation
- Unemployment rates – what is the workforce participation rate trend
- GDP – how much gross domestic product is a country producing
- Interest rates – are we in a rising or falling interest rate environment
- Durable Goods – The Commerce Department reports this statistic month-to-month. But YOY calculations warned of the Great Recession as early as October 2006.
- Manufacturing Jobs – America had been losing manufacturing jobs on a monthly basis for years. But when jobs started declining YOY in 2007, it was a sign of the pending recession.
- Gross Domestic Product (GDP) – It says how fast the economy grew in the most recent quarter. The Bureau of Economic Analysis (BEA) annualizes the GDP growth rate. It reports how much the economy would produce for the entire year if it continued growing at the same rate. The BEA does that so it’s easier for you to do a YOY comparison with previous years of GDP growth.
(Source: corporatefinanceinstitute.com & thebalance.com)
Benefits of YoY Analysis
A year-over-year calculation compares a measurable value for one period to the same period the previous year. The period can also be on a monthly or quarterly basis. The year-over-year growth rate calculates the percentage change during the past twelve months. Year-over-year (YOY) is an effective way of looking at growth for a number of reasons.
YOY measurements make it easier to cross-compare similar sets of data. For example, using a company’s first-quarter revenue in a YOY format, a financial analyst or investor can compare years of first-quarter revenue data. It is possible to quickly ascertain whether a company’s revenue is increasing, decreasing, or remaining static.
Advantages
- Adjusts seasonality and volatility – YoY removes the effects of seasons. For example, say your business revenue rose 20% last month. Before you celebrate, you should first check it against the income from the same month last year. Maybe your sales always rise this time of year. If sales typically rise 35% this month, then your revenue is down year-over-year. Your business is doing worse, not better. As a result, it smoothes out volatility throughout the year to compare net results.
- Highlights trends – Second, it discerns long-term trends. Say a business is growing at a nice, steady 2% a month. But if it grew 3% a month last year, it will be down when compared year-over-year.
- Easy to calculate and compare – No need for a spreadsheet or financial calculator. The results are in percentage terms for easy comparison across different-sized companies.
For example, in the third quarter of 2017, Barrick Gold Corporation reported a net loss of $11 million, year-over-year. Further, the company reported net earnings of $175 million in the third quarter of 2016, which showed a decrease in Barrick Gold’s earnings from comparable, annual periods.1 This YOY comparison is also valuable for investment portfolios. Investors like to examine YOY performance to see how performance changes across time. (Source: investopedia.com & ibid)
Reasons Behind Year-over-Year Analysis
In many ways, a year-over-year comparison is more valuable for investors than a quarter-over-quarter, or sequential comparison. Many companies operate cyclically, where a large portion of annual revenue is generated in a specific quarter. For example, retailers and department stores, which generate the vast majority of their annual profits in the fourth quarter. This is during the busy holiday shopping season. Comparing the company’s fourth-quarter results to its third-quarter results would give investors the wrong impression. The fourth quarter will almost always show significant growth from the third quarter.
Therefore, YOY comparisons are popular when analyzing a company’s performance. This is because they limit volatility and seasonality. These are factors that can influence most business metrics. Sales, profits, and other financial values change during different periods of the year. This is because most businesses have a peak season and a low-demand season. To properly measure a company’s performance, it makes sense to compare revenue and profits year-over-year.
It’s important to compare the fourth-quarter performance in one year to the fourth-quarter performance in other years. It can mislead an investor to look at a retailer’s results in the fourth quarter versus the prior third quarter. It might appear a company is undergoing unprecedented growth. However, it is seasonality that is influencing the difference in the results. Similarly, comparing the fourth quarter to the following first quarter can mislead. There might appear a dramatic decline when this could also be a result of seasonality.
How to Calculate YoY (Year-Over-Year) Growth Rate
The formula to calculate YoY growth or decline is simple. You divide the new number by the old number to find the ratio. To convert to percentages, you can subtract by 1 and then multiply by 100.
YoY (Year-over-year) = [(Current year – Previous year) / Previous year] x 100 = % Growth or Decline
To calculate the year-over-year growth rate, you only need two numbers and a calculator. Then take these steps.
YoY Calculation
- Subtract last year’s number from this year’s number. That gives you the total difference for the year. If it’s positive, it indicates a year-over-year gain, not a loss. For example, this year you sold 120 new cars. Last year you sold 100. You sold 20 additional new cars this year over last year.
- Divide the difference by last year’s number. That’s 20 new cars divided by 100 new cars. That gives you the year-over-year growth rate.
- Convert to percent – Now simply put it into percent format. You find 20 / 100 = (0.2 x 100) or 20%.
Macroeconomic Example
In June 2011, total employment was 131.955 million. Total employment in June 2010 was 130.530 million. Here’s how to calculate the year-over-year growth rate.
- Subtract 130.530 million from 131.955 million. The difference is 1.425 million.
- Divide 1.425 million by 130.530 million, last year’s employment number.
- The answer is 0.0109 or 1.09%. That’s the year-over-year growth rate. (Source: thebalance.com)
Kellogg Company Example
In a 2019 NASDAQ report, Kellogg Company released mixed results for the fourth quarter of 2018, revealing that its year-over-year earnings continue to decline, even while sales have increased following corporate acquisitions. Kellogg predicts that adjusted earnings will drop by a further 5% to 7% in 2019, as it continues to invest in alternate channels and pack formats. The company has also revealed plans to reorganize its North America and Asia-Pacific segments, removing several divisions from its North America segment and reorganizing its Asia-Pacific segment into Kellogg Asia, Middle East, and Africa. Despite decreasing year-over-year earnings, however, the company’s solid presence and responsiveness to consumer consumption trends mean that Kellogg’s overall outlook is favorable. (Source: investopedia.com)
Why YoY is important
Looking at year-over-year comparisons for companies is one of the simplest ways to tell whether they are growing or declining. It is generally an advantage to invest in stocks that are growing. This is because they tend to increase their revenue and earnings over time, causing the stock prices to rise. On the other hand, companies with declining revenue and earnings tend to see significant reductions in their stock prices.
There are many ways to analyze performance and valuation metrics. It’s in investors’ best interest to analyze more than a company’s financial results in a given quarter or year. In the financial analysis process, investors should be aware of the differences between quarter-over-quarter and year-over-year comparisons. In almost every instance, it is more valuable to use year-over-year.
Frequently Asked Questions
What is YoY (year-over-year) used for?
YOY is used to make comparisons between one time period and another that is one year earlier. This allows for an annualized comparison, for example between third-quarter earnings this year vs. third-quarter earnings the year earlier. It is probably more meaningful to judge a company’s quarterly results with those of the same quarter in the previous year. This is more of an “apples-to-apples” comparison and gives investors a better chance to reach the correct conclusion regarding the company’s performance. It is commonly used to compare a company’s growth in profits or revenue. In macroeconomics, it can also be used to describe yearly changes in an economy’s employment, money supply, gross domestic product (GDP), inflation, or other broad economic indicators.
How is year-over-year calculated?
YOY calculations are straightforward and usually are expressed in percentage terms. The formula to calculate YoY growth or decline is simple. You divide the new number by the old number to find the ratio. To convert to percentages, you can subtract by 1 and then multiply by 100.
What is YoY vs YTD?
YOY looks at a 12-month percentage change. YTD helps calculate growth from the beginning of the year, calendar, or fiscal, until the present date. YOY calculations can start from a specific date. They then compare the numbers with those from the year earlier.
Next: Form 2439: Notice to Shareholder of Undistributed Long-Term Capital Gains
Form 2439 is an IRS tax form required to be issued by RICs, Mutual Funds, ETFs, & REITs. Regulated Investment Companies must report any gains they do not distribute to their shareholders. When the fund company decides to retain these gains, it must pay taxes on behalf of shareholders and report these transactions on Form 2439.
A mutual fund usually distributes all its capital gains to its shareholders. The mutual fund company reports these gains on Form 1099-DIV. However, a fund might choose to keep some of its capital gains and pay a tax on them. When this happens, the mutual fund company will send out Form 2439 to its shareholders. It is an IRS Notice to Shareholders of Undistributed Long-Term Capital Gains.
