Year-Over-Year: What is it & when is YOY 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. It 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.

The YOY percentage change is calculated as follows:

YOY % change = ((current year data – previous year data) / previous year data) x 100

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. 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.

Furthermore, 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. Additionally, 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.

Even though YOY is a commonly used tool it also comes with limitations. Compared to metrics such as month-over-month (MoM), it provides significantly fewer data points. As a result, important trends can be missed by decision-makers. For instance, seasonality (how certain seasons affect revenues) is not accounted for in a YoY analysis. Businesses in holiday destinations, such as ski resorts, hotels, and restaurants, experience high seasonality, which should be considered in financial reports.

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.