Year-Over-Year (YOY)

MoneyBestPal Team
A method of evaluating two or more measured events to compare the results at one time period with those of a comparable time period on an annualized.

The year-over-year (YOY) approach compares outcomes from one time period with those from a similar time period on an annualized basis. It can be used for two or more measured events. Investors, analysts, and business owners who wish to track the performance of a firm or an industry over time might benefit from YOY research.

What Does YOY Mean?

Year-over-year, or YOY, refers to comparing the same time period across different years. A YOY comparison would be used, for instance, to compare a company's revenue from the first quarter of 2023 to the first quarter of 2022. A YOY comparison is also used if we want to compare a country's inflation rate between March 2023 and March 2022.

Any time frame, including a month, quarter, or year, is suitable for YOY analysis. To prevent seasonal or cyclical influences that can skew the data, it is crucial to compare the same time period across different years. For instance, comparing a retailer's revenue in June 2022 to December 2023 would be meaningless because June is not typically a high month for retail sales because of the holiday shopping season.

How Is YOY Used in Finance?

In finance, YOY analysis is frequently used to assess how well a firm, an industry, or an economy has performed over time. Investors and analysts can assess the amount of growth or decline and identify any trends or patterns by comparing the same period in different years.

Some of the common financial metrics that are compared on a YOY basis are:
  • Revenue: The amount of sales or revenue a business has made from its goods or services.
  • The cost of goods sold (COGS): It measures how much money a business has invested in creating or purchasing its goods and services.
  • Gross Margin: How much profit was generated by a company's products or services after COGS were subtracted?
  • Operational Expenses: How much money does a business spend on its everyday operations, including marketing, R&D, and payroll, among other things?
  • EBITDA: It stands for earnings before interest, taxes, depreciation, and amortization. It measures how much cash flow a business has produced from its core operations before taking these factors into consideration.
  • Net income: The amount of profit a business has made after deducting all costs and taxes.
  • Earnings Per Share (EPS): It is the amount of profit generated by a company per share of its ordinary stock.
For instance, if a business reports that its first-quarter sales increased by 10% year-over-year in 2023, this indicates that its first-quarter revenue in 2023 was 10% more than that of 2022.

Similarly, some of the common economic indicators that are compared on a YOY basis are:
  • Gross Domestic Product (GDP) measures the economic output of a country's goods and services.
  • Inflation: How much has the general level of prices increased or decreased?
  • Unemployment: How many people are looking for work but cannot find it?
  • Interest Rates: How much does it cost to borrow or lend money?

For example, if a country reports that its GDP grew by 2% YOY in 2022, it means that its GDP in 2022 was 2% higher than its GDP in 2021.

What Are the Benefits and Limitations of YOY Analysis?

YOY analysis has several benefits and limitations that should be considered when using it. Some of the benefits are:
  • It gets rid of any seasonal or cyclical influences that might have an impact on the outcomes of various times of the year.
  • It offers a precise and reliable method of determining how quickly something grows or declines.
  • It enables simple comparisons between various businesses, markets, or economies.

Some of the limitations are:
  • The outcomes of different years may be impacted by changes in the market or other factors that are not taken into consideration.
  • The volatility or variability of the outcomes over the course of a year is not disclosed.
  • It might not be able to catch long-term patterns or cycles lasting longer than a year.