YoY is a common acronym used in finance that means year-over-year. It is often used to compare results in two periods of time. As it allows investors to assess the growth of a particular metric. It is extremely useful when it comes to evaluating a company’s performance, and growth rates.
The ability to compare the same period of time is a more accurate way of analyzing a company. It is mostly used due to the fact that it is not impacted by seasonality. Some businesses have a particular time of the year when they tend to perform better. If this is the case, comparing the results of two distinct time periods will not be useful. This is because it can be highly influenced by seasonality.
How to use YoY?
YoY is often used to compare results during a certain period of time, with the same period in the previous year. It can be used to compare results monthly, quarterly, semesterly, and yearly. This allows you to compare different aspects of the company during those two time periods.
To accurately analyze a company’s revenues or profits, YoY gives a much more accurate picture of how the business is growing. It can also be used to compare operational metrics, that can give investors an insight into how the business is doing. For example, in some companies user growth can be analyzed YoY or the number of subscriptions for certain businesses.
It can also be used to analyze the balance sheet, and see if the company’s assets or liabilities are either growing over a year or not.
A great advantage of using YoY is that it allows investors to analyze two similar time periods, which decreases the chances of the data being influenced by seasonality. For example, a business that sells toys will likely see a revenue spike in the fourth quarter, due to Christmas. Therefore comparing the 4Q with 1Q does not make much sense. Because they are so different from one another. Instead, analysts and investors will often compare similar periods. Comparing the results of the current quarter with the same quarter of last year.
When you should not use YoY
There are some companies, depending on the industry that may not be so affected by seasonality. In those cases, it is a much better approach to analyze QoQ, quarter-over-quarter. This means that you are comparing financial metrics or results of the current quarter with the previous one.
What is the YoY growth formula?
It is very simple to calculate the growth of any particular metric or financial result YoY.
YoY Growth = (Current Year – Previous Year / Previous Year) x100
This will give you a percentage that represents the growth YoY for any particular metric or a financial result of the company.
What can I use instead of year-over-year?
There are a few alternatives to YoY that might be useful depending on the specific industry of the company. One of them is YTD (year-to-date). YTD represents the results over the last twelve months, which can also be useful, which is also referred to as TTM (trailing twelve months).
QoQ (quarter-over-quarter) could also be used for different businesses that are not so seasonal. You can even use MoM (month-over-month), which will give you an even more accurate image of how the company is doing. However, any comparison MoM could give an inaccurate view of the growth, because in the short-term the results might vary considerably.
Image source: Unsplash