Year Over Year (YOY) Meaning:
The YOY or Year Over Year technique compares the outcomes of one time period with those of a comparable time period on an annualised basis by analysing two or more observed events. It is a common and simple technique for data analysis and long-term trend identification. This approach is especially helpful for evaluating performance, development, or decrease over time in financial and business environments.
YOY analysis contrasts the financial results of a business for a certain period with that of the prior year. Comparing months to months is thought to be less useful because monthly comparisons frequently reveal seasonal patterns.
YOY is a technique that compares the outcomes of one period with those of a comparable period on an annual basis in order to assess two or more measured events.
YOY is a common and useful technique for evaluating a company’s financial performance and comparisons.
YOY reporting is a tool used by investors to assess a company’s financial performance.
What is YOY?
Year-over-year (YOY), also referred to as year-on-year, is a popular financial comparison used to assess two or more quantifiable events annually. One way to assess if a company’s financial situation is getting better, staying the same, or getting worse is to look at its year-over-year performance. For example, a company’s financial reports can show that, year over year, for the previous three years, its revenues grew in the third quarter.
A common practice in year-over-year comparisons is to assess quarterly, monthly, and annual performance.
Benefits of YOY (Year-Over-Year)
Cross-comparison of datasets is made possible using YOY measures. A financial analyst or investor can rapidly ascertain if a company’s revenue is increasing or falling by comparing multiple years’ worth of first-quarter sales by using year-over-year (YOY) data to examine the revenue for that quarter.
Despite seasonal fluctuations in consumer behaviour, accurate comparisons can be achieved by comparing the same months in different years. Because investors commonly look at year-over-year performance to see how performance changes over time, this YOY comparison is also helpful for investment portfolios.
Some benefits are:
Clarity and Simplicity: YOY analysis is simple to comprehend and apply, which makes it useful for a variety of users, including analysts, investors, and business managers.
Finding Trends: Year-over-year comparisons offer a more comprehensive view of performance across time by assisting in the identification of long-term trends and patterns.
Seasonal Adjustment: Year-over-year (YOY) analysis provides a more accurate assessment by accounting for seasonal fluctuations by comparing the same period in various years.
Benchmarking: Using year-over-year measurements, businesses can assess their performance in relation to competitors or industry norms.
Strategic Planning: By emphasising growth areas and potential obstacles, YOY analysis supports strategic planning and decision-making.
Uses of YOY (Year-Over-Year)
Year-over-year comparisons are widely used in performance analysis of companies due to their ability to reduce the effects of seasonality, which can affect a majority of organisations. Seasons of high and low demand in different industries cause fluctuations in sales, profitability, and other financial variables throughout the year.
For example, during the fourth quarter of the year, retailers see their greatest demand during the holiday shopping season. It makes sense to compare revenue and profits year over year in order to appropriately evaluate a company’s performance.
It is imperative that the fourth-quarter results of one year be compared with those of previous years. Investors may be misled into believing that a retailer has experienced tremendous growth if they compare the fourth quarter’s performance to the third quarter, when in fact seasonal considerations are at play.
Comparing the fourth quarter of a given year to the first quarter of the next year may also reveal a sharp drop, which may just be the result of seasonal factors.
YOY comparisons are not the same as sequential comparisons, which compare a month or quarter to the prior one in order to show linear progression. Sequential comparisons could, for instance, examine how many smartphones a tech business sold in the fourth quarter as opposed to the third, or how many airline seats were booked in January as opposed to December.
Example of YOY (Year-Over-Year )
Let ABC Retailers be a retail company that wishes to use year-over-year comparisons to assess its success. Here are a few instances of how ABC Retailers could apply year-over-year analysis to various indicators.
Revenue Growth:
ABC Retailers generated $5 million in revenue in 2022 and $6 million in revenue in 2023. This is how the revenue growth can be computed year over year:
YOY Revenue Growth=(Revenue in 2023−Revenue in 2022)×100
———————————————-
Revenue in 2022
YOY Revenue Growth=(6,000,000−5,000,000)
——————————–×100
5,000,000=20%
This indicates a 20% increase in revenue from 2022 to 2023.
Profitability:
ABC Retailers’ net income was $500,000 in 2022 and $700,000 in 2023. Net income growth year over year is computed as follows:
YOY Net Income Growth=(Net Income in 2023−Net Income in 2022)
——————————————————– ×100
Net Income in 2022
YOY Net Income Growth=(700,000−500,000)
————————– ×100
500,000
This indicates a 40% increase in net income from 2022 to 2023.
Expense Management:
The year-over-year change in ABC Retailers’ operating expenses, assuming that they were $3 million in 2022 and $3.2 million in 2023, would be:
YOY Expense Change= (3,200,000−3,000,000)
——————————×100=6.67%
3,000,000
This shows a 6.67% increase in operating expenses from 2022 to 2023.
Why Is YOY Used?
YOY allows you to compare a given time period to the same period a year ago. This makes it possible to perform an annualised comparison, such as comparing this year’s third-quarter earnings to last year’s. In addition to describing yearly changes in an economy’s money supply, GDP, and other economic indicators, it is frequently used to evaluate a company’s growth in earnings or revenue.
How Is YOY Calculated?
YOY computations are simple and usually given as percentages. To find the percentage, divide the value for the current year by the value for the previous year, deduct one, then multiply the result by 100. The formula is (this year ÷ last year) − 1. For the percentage (this year÷last year)−1×100.
Conclusion
YOY analysis is One of the most effective methods for assessing performance, spotting patterns, and coming to wise judgments. It gives a straightforward and simple metric of growth or decline by comparing the same time across several years, assisting firms, investors, and governments in understanding long-term developments and making strategic plans. YOY analysis is a vital technique in financial and commercial analysis, even with its drawbacks due to its ease of use and efficacy.