What is Year-Over-Year: When is it used?

Definition

Year-over-year (YOY) is a financial metric used to compare a specific data point or performance measure in the current year to the same data point or measure in the previous year.

What is year-over-year?

Year-over-year is a useful tool for analysing trends and evaluating the growth or decline of various aspects of a business or economic activity over a one-year period. Here are some key points about year-over-year (YOY):

1. Comparison period:
– YOY compares data from the same period in consecutive years. For example, comparing sales revenue for Q3 of this year to Q3 of the previous year.

2. Calculation:
– The YOY percentage change is calculated as follows:
YOY % change = ((current year data – previous year data) / previous year data) x 100

3. Positive and negative growth:
– A positive YOY percentage indicates growth or an increase in the measured parameter compared to the previous year. Conversely, a negative YOY percentage indicates a decline or decrease.

4. Usage in business:
– YOY comparisons are commonly used in various business metrics, including sales revenue, profit margins, customer acquisition, website traffic, and more. It provides a way to assess the effectiveness of strategies and initiatives.

5. Seasonal adjustments:
– YOY comparisons can be adjusted for seasonal variations, especially in industries where there are significant seasonal fluctuations in business activity. This allows for a more accurate assessment of underlying trends.

6. Economic indicators:
– YOY analysis is widely used in economic indicators, such as gross domestic product (GDP), employment figures, inflation rates, and consumer spending. It helps economists and policymakers understand the trajectory of economic growth.

7. Investment analysis:
– Investors use YOY comparisons to evaluate the performance of stocks and other investments. Positive YOY growth in metrics like earnings per share (EPS) or revenue can be a positive signal for investors.

8. Budgeting and forecasting:
– Businesses use YOY data to inform budgeting and forecasting processes. It helps in setting realistic goals and expectations for the coming year based on historical performance.

9. Marketing and sales:
– YOY comparisons are crucial in assessing the effectiveness of marketing campaigns and sales efforts. It allows businesses to understand whether their strategies are driving growth or need adjustment.

10. Long-term trends:
– By examining YOY data over multiple years, businesses can identify long-term trends and patterns. This can be valuable for strategic planning and decision-making.

11. Limitations:
– YOY analysis may not capture short-term fluctuations or changes within a year. It is best used for assessing trends over a longer time frame.

Overall, year-over-year analysis is a valuable tool for businesses and analysts to understand how performance metrics are changing over time and to make informed decisions based on historical data. It provides a benchmark for evaluating progress and identifying areas for improvement.

Example of year-over-year

ABC Corporation, a retail chain, analyses its sales data for the month of June. They find that their sales for June 2023 were $500,000. They then compare this figure to their sales for June 2022, which were $450,000.

To calculate the year-over-year (YoY) change in sales, they use the formula from above:

This means that ABC Corporation’s sales for June 2023 increased by approximately 11.11% compared to June 2022.