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Year-Over-Year (YOY): (Detailed Guide)

Year-Over-Year (YOY)
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Year-over-year (YOY), also known as year-on-year, serves as a common financial comparison method that evaluates two or more measurable events annually. Assessing YOY performance enables understanding whether a company’s financial standing is progressing, stable, or declining. For instance, in financial reports, you might encounter information indicating that a specific business witnessed revenue growth in the third quarter consistently over the past three years when compared on a YOY basis.

Understanding Year-Over-Year Growth

Year-over-year growth, or YOY growth, is a method of evaluating a company’s recent financial performance by comparing its current numbers with those from the same month in the previous year. This approach is deemed more insightful than a month-to-month comparison, which seasonal variations may influence.

Typical YOY comparisons encompass annual, quarterly, and monthly performance metrics.

Benefits of YOY

Year-over-year (YOY) measurements serve as a valuable tool for comparing data sets overtime periods. In analyzing a company’s first-quarter revenue using YOY data, financial analysts and investors can efficiently gauge whether the revenue is on an upward or downward trend by comparing revenue figures from the same quarter in different years.

For instance, in the first quarter of 2023, Kenya Airways reported a 7% increase in net revenues compared to the first quarter of the preceding year. This method enables accurate comparisons despite fluctuations in consumer behavior due to seasonal trends.

Moreover, YOY comparison holds significance for investment portfolios. Investors find it beneficial to evaluate YOY performance to track changes in performance over time and make informed investment decisions.

Reasoning Behind YOY

Year-over-year (YOY) comparisons serve as a crucial tool in evaluating a company’s performance, effectively mitigating the impact of seasonality, a significant factor influencing most businesses. Sales, profits, and other financial metrics fluctuate throughout the year due to the varying demand levels associated with peak and off-peak seasons.

Consider the retail sector, where the holiday shopping season in the fourth quarter typically witnesses peak demand. To accurately assess a company’s performance, comparing revenue and profits Year-over-year is essential.

It’s imperative to assess fourth-quarter performance in one year against that of previous years. Evaluating a retailer’s fourth-quarter results against the preceding third quarter might falsely suggest unprecedented growth, masking the influence of seasonality on the outcomes.

Likewise, comparing fourth-quarter results with those of the subsequent first quarter might reveal a dramatic decline, which could also be attributed to seasonality.

It’s important to note that Year-over-year differs from the term “sequential,” which tracks performance from one quarter or month to the previous one, offering insights into linear growth. For instance, a sequential analysis might involve comparing the number of cell phones sold by a tech company in the fourth quarter with those in the third quarter or the number of airline seats filled in January compared to December.

Real-World Example

In a 2019 report by NASDAQ, Kellogg Company presented a mixed picture for the fourth quarter of 2018. Despite an increase in sales following corporate acquisitions, the year-over-year earnings showed a decline. Kellogg anticipated a further 5% to 7% decrease in adjusted earnings for 2019 as it focused on investing in alternate channels and packaging formats.

Furthermore, Kellogg announced plans to reorganize its North America and Asia-Pacific segments. This reorganization involves streamlining divisions in North America and restructuring the Asia-Pacific segment into Kellogg Asia, Middle East, and Africa. Despite the decline in year-over-year earnings, Kellogg’s strong market presence and ability to adapt to consumer consumption trends maintained a positive overall outlook for the company.

What Is YOY Used For?

YOY, or year-over-year, serves as a tool for comparing data between two consecutive periods separated by a year. It facilitates an annualized evaluation, such as comparing third-quarter earnings for the current year with those of the previous year. This method frequently applies to analyzing a company’s profit or revenue growth. Moreover, it extends to describing annual fluctuations in economic indicators like money supply, gross domestic product (GDP), and various other measurements of economic activity.

Frequently Asked Questions About YOY

How Is YOY Calculated?

Year-over-year (YOY) calculations are simple and typically presented as percentages. To compute YOY, you divide the current year’s value by the previous year’s value and then subtract one: (This year / Last year) – 1.

What’s the Difference Between YOY and YTD?

Year-over-year analysis examines changes over 12 months. Meanwhile, YTD (Year-to-Date) analysis focuses on changes relative to the start of the year, typically January 1st. YTD analysis offers a cumulative view of performance, whereas YOY analysis serves as a benchmark for comparison at a specific point in time.

What If I Am Interested in Comparisons for Less Than a Year

You can calculate month-over-month or quarter-over-quarter (Q/Q) similarly to year-over-year (YOY). Essentially, you have the flexibility to select any time frame you prefer for your analysis.

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