Year-over-year (YOY)
Year-over-year (YOY) is a method of estimating two or more variable events to compare results over the same period of time in different years. Year-over-year comparison is a popular and quite effective technique to evaluate a company's financial performance and investment efficiency. The year-over-year method should not be confused with a year to date (YTD) method, which takes into account the change since the start of the year (generally January 1st).
Year-Over-Year Explained
By looking at year-over-year financials, a company can conduct a thorough analysis and conclude whether the company is moving forward or stagnating. For instance, a certain company's financial statement might report a decrease in revenues for the second quarter, on a year-over-year basis, and this information may be useful in making a decision by a certain investor.
Any recurring event is subject to a year-over-year comparison. Analyzing annual data helps track the rise or fall of a particular variable throughout the year, not just on a weekly or monthly basis.
This year-over-year comparison method is needed to assess a growth of a company's profit between one time period and another in the prior year, but it may also be indispensable in macroeconomics, to describe annual changes in gross domestic product (GDP), inflation, industrial production and other critical economic indicators.
Calculations on a year-over-year basis are clear and have a percentage expression. The following formula is used for the calculation: (this year)/(last year) - 1, that is, the current year value should be divided by the previous year value and then subtract one.
Pros of YOY
The year-over-year method has a number of advantages:
Benefits for investors. YOY-based measurements help to make optimal comparisons of multiple datasets. YOY data allows investors and financial analysts to compare a company’s earnings in several similar periods over the years and visually track the growth or decline in profitability, that is why YOY method is helpful for investment portfolios.
Accuracy of data. Different business segments may experience fluctuations in sales, profits and other financial indicators at different times of the year, as their demand peaks and falls occur during various periods of the year. Thus, demand peaks in the retail sector happens at the end of the year during the Christmas sales period, while the retail sector has the peak of prices due to increased demand falls on the period from January to March. Matching of indicators of the same months of different years allows maintaining the accuracy and relevance of calculations. A factor such as seasonality, which influences consumer behavior and therefore affects companies' businesses, can be mitigated through YOY. Therefore, to assess the effectiveness of the company adequately, it is worth comparing the profit on a year-over-year basis.
The assessment will not be adequate if, for example, the indicators of the fourth quarter are compared with the indicators of the first quarter of the next year, where a sharp drop can be felt, which is a logical consequence of seasonality. If an analyst compares retail sales results in the fourth quarter with the previous third quarter, it may seem that the company is in a state of insane growth, even though it is seasonality that has such an impact on the difference in results. Therefore, for a reasonable assessment, it is necessary to compare the indicators of the fourth quarter of the current year with those of the fourth quarter of previous years.
