In finance, year-over-year (YOY) performance looks at two different events on an annual basis. For example, you can look at how a single stock performed in the third quarter of 2019 and 2020. By comparing these two figures, you can see whether the stock performed better this year than it did last year.
There are many reasons why this kind of analysis is important. When you look at unemployment figures and retail sales, you have to consider the time of year. Retail sales typically perform better around the holidays. Likewise, unemployment tends to go up and down on a seasonal basis. If you only compare this month’s results to last month’s results, you may end up with a skewed perception of the marketplace.
When you look at the year-over-year differences in financial data, you can gain a better understanding of how everything is changing. Because of this, year-over-year comparisons are popular among financial analysts and investors. By using this information, you can tell if a company is improving its long-term performance or not.
What Is Year-Over-Year Performance?
Year-over-year comparisons are a way of looking at your investment’s performance over time. It is also used to evaluate a company’s financial performance. As long as an event can be measured, you can analyze it using a year-over-year basis.
Also known as a year-on-year comparison, it can be calculated on a quarterly, monthly or annual basis. For example, you can review a company’s revenue from the second quarter or profits from February. Then, you would look at the same time period in a different year.
In a sense, this kind of analysis allows you to make an apples-to-apples comparison. Because you are looking at the same time of year, the company should be undergoing similar customer demand. A YOY comparison is one of the fastest ways to analyze a company’s long-term revenue.
For example, Berkshire Hathaway’s revenue in the fourth quarter of 2020 was 1.51 percent lower than it was in the fourth quarter of 2019. Because of the 2020 pandemic, Berkshire Hathaway experienced a few quarters where its year-over-year growth shrank. In 2019, the company’s year-over-year growth ranged between 2.24 percent and 3.77 percent.
Sequences and Seasonality
Sometimes, investors use a sequential comparison to measure the growth between one time period and the next one. For example, you could look at the number of computers sold by Dell in January versus February. Often, streaming services will measure the month-to-month or quarter-to-quarter growth in their user base.
When looking at a company’s performance, year-over-year comparisons are fairly common. This is because they give you a more accurate understanding of the company’s financial situation. Year-over-year comparisons essentially get rid of seasonality. This is especially important in businesses and industries that have peak seasons. For example, the fishing industry is only allowed to fish for part of the year. This means sales are naturally lower outside of the legal fishing season.
The Advantages of Using a Year-Over-Year Analysis
- You can negate the impact of seasonality on your data.
- The average person can easily calculate year-over-year changes on their own.
- Year-over-year comparisons reduce the volatility that normally happens with month-to-month numbers.
- The percentage changes are easy to understand for new investors.
The Disadvantages of Using a Year-Over-Year Analysis
- Often, a year-over-year analysis will only make sense when you contextualize it with other data.
- You can overlook short-term problems if you focus on year-on-year comparisons for quarterly results.
- It is often harder to find year-over-year comparisons because news agencies generally report monthly trends. You may have to spend more time calculating the year-over-year data using the company’s financial statements.
- A single bad month can skew the overall trends. Likewise, an exceptional month can hide a year’s worth of revenue issues and underlying problems at the company.
Like most financial metrics, year-over-year comparisons have their advantages and disadvantages. Most people do not use year-over-year analyses alone. Instead, they use them to gain an understanding of the big picture.
What Is the Difference Between Year-Over-Year and Year-to-Date Growth?
Year-over-year growth compares financial data from a set amount of time in one year to the same amount of time in a different year. With year-to-date growth, investors look at how financial data has changed since the beginning of the year. Year-to-date growth can be used for the fiscal year or calendar year.
How Do You Calculate YOY Comparisons?
In order to calculate a company’s year-over-year growth, you need the new number and the old number. You divide the new number by the old number in order to get a ratio. Then, you have to change the ratio to a percentage by subtracting 1 and multiplying your result by 100.
For example, Facebook earned $84.2 billion in advertising revenue in 2020. During the previous year, Facebook earned $69.7 billion. If you divide $84.2 billion by $69.7 billion, you get 1.2. Then, you subtract 1 from 1.2 and multiply your new answer by 100. The final result is a year-over-year growth rate of 20.8 percent.
How Month-Over-Month Comparisons Work
Month-over-month growth uses the same concept as year-over-year growth. You can use month-over-month growth to reflect a certain metric’s change between one month and another month. Companies often use month-over-month comparisons to track how short-term policies are affecting revenue and other financial data.
Why Are Year-Over-Year Comparisons Important?
As an investor or business manager, it is important to learn how to use year-over-year comparisons. If you are thinking about making a potential investment, you can use a year-over-year comparison to see if the company is growing or shrinking.
A year-over-year analysis is also important for cyclical businesses like retailers. For example, Target posted a total revenue of $17.6 billion during the first quarter of 2019. During the fourth quarter of 2019, Target achieved $23.4 billion in total revenue.
From the first quarter to the fourth quarter, Target’s sales grew by 32.9 percent. These results would be truly impressive, but they are misleading because of the cyclical nature of Target’s sales. Once you compare the fourth quarter of 2019 to the fourth quarter of 2018, you will see that the fourth quarter sales were fairly normal. In the fourth quarter of 2018, Target’s total revenue was $23 billion. This means that total revenue really increased by just 1.74 percent.
Examples of YOY Comparisons
By looking at year-over-year comparisons, you can see how the financial situation is changing at a company. This technique also works on a national level. While most government statistics are reported on a quarter-to-quarter or month-to-month basis, a year-over-year basis provides important information. Prior to the 2008 recession, the year-over-year comparisons for durable goods warned of a problem as early as October 2006.
The government also publishes gross domestic product (GDP) with year-over-year comparisons. The Bureau of Economic Analysis annualizes the growth rate for GDP. That way you can easily compare the current GDP growth to a previous year’s GDP growth. At the end of each year, these annualized rates are changed to the actual rate.
You can use year-over-year comparisons to analyze popular stocks. For instance, Tesla earned $31.5 billion in total revenue in 2020. In 2019, the company earned $24.6 billion. This means Tesla enjoyed a year-over-year increase of 28 percent.
In Tesla’s case, this kind of data is especially important because Tesla normally operates at a loss. Until 2020, Tesla’s net income was negative every year. By looking at the year-to-year comparison, we can see that Tesla’s positive net income was not a coincidence. The company’s revenue increased significantly during the year, which most likely contributed to the improvement in Tesla’s net income.
Year-over-year comparisons are an important tool for investors, but they are not the only tool available. There are many other calculations you can do to figure out if an investment is a good decision or not. By using year-over-year calculations, you can make wiser investment choices.
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Ben Broadwater is the Director of Investment U. He has more than 15 years of content creation experience. He has worked and written for numerous companies in the financial publishing space, including Charles Street Research, The Oxford Club and now Investment U. When Ben isn’t busy running Investment U, you can usually find him with a pair of drumsticks or a guitar in his hand.