YOY (Year-Over-Year): How It’s Used in Finances?
Read on to learn:
The Definition of YOY
YOY, also known as year-over-year, is a term used after a financial analysis metric most frequently implemented when comparing two or more quantifiable scenarios. YOY (year-over-year) is widely used across the globe as a way to get a better picture of an event’s progress, of course, on an annual basis.
You may read 5 fees to never pay a car dealership. What to Know and How to Avoid Them?
YOY can be used, for example, to determine if a company’s financial performance is improving, remaining constant, or declining. For instance, you can read in financial reports that a certain company stated its third-quarter revenues increased year over year (YOY) for the previous two years.
The applications of YOY are endless and are always aimed to provide a wide perspective on growth and performance.
How to Understand Growth with YOY
Maintaining an open and active posture is crucial in the business sector. Growth for a business is solely dependent on its capacity to embrace change and leverage it to its advantage.
Companies should be able to evaluate their performance objectively and constructively as time passes and changes occur. That is where YOY makes its debut.
A company’s latest financial performance is compared to its data for the same month a year ago to determine its YOY (year-over-year) growth. When compared to a month-to-month analysis, which frequently reflects seasonal variations, this is a more insightful and resourceful way to analyze a company’s growth.
Annual, quarterly, and monthly performance are all common YOY comparisons.
Benefits of Using YOY
Using YOY metrics makes it easier to compare different data sets. A financial analyst or investor can rapidly determine whether a company’s first-quarter revenue is increasing or declining by comparing years’ worth of first-quarter revenue data.
Let’s take for example one of the most well-known brands across the world –Coca-cola. The company announced a 5% rise in net revenues for the first quarter of 2021 compared to the same period during previous year. This is a YOY analysis.
One must note despite the diversity in consumer behavior, companies are able to pull up valid comparisons when setting up the same months in various years when using YOY.
YOY comparisons are helpful for investment portfolios as well. Investors enjoy looking at year-over-year performance to observe how performance evolves over time.
Why Using YOY?
Since YOY reduces seasonality, a characteristic that can affect most organizations, YOY comparisons are preferred for evaluating a company’s success. Since most business sectors experience a high season and a low season, sales, profitability, and other financial measures fluctuate throughout the year.
You may also read: What Is A Townhouse?
For instance, during the holiday shopping season, which occurs in the fourth quarter of the year, shops experience a boom in demand. In this context, the company can benefit a lot from comparing its sales in the same season, as it is a more objective way to find out the growth the business experienced throughout the year.
YOY is an accurate way to analyze performance and other data as it takes information within a pretty similar context, the holiday season, for example.
Comparing one year’s fourth-quarter performance against other years’ fourth-quarter performances is crucial.
For example, if an investor compares a retailer’s fourth-quarter earnings to those of the third quarter prior, it can appear that the company is experiencing unheard-of growth when in fact the difference in results is the product of seasonality.
Under the same premise, a substantial fall may emerge when comparing the fourth quarter with the first quarter that follows. These are all phenomena that could be related to seasonality.
YOY is also linked to the term sequential. This word is used to describe the comparison between one quarter or month to the prior one, enabling investors to monitor linear progress.
This is a very different metric than YOY. As an example, you could take the amount of cell phones a tech business sells in January compared to December.
How do People Use YOY?
Since YOY is a comparison metric that is used to compare two time periods that are separated by one year, it is usually linked to growth and performance analysis.
It enables comparisons, frequently financial, on an annual basis. It can also be used to represent yearly changes in an economy’s money supply, gross domestic product (GDP), and other economic indicators.
This tool is frequently used to compare a company’s growth in earnings or revenue.
How Is YOY Determined?
Usually calculations for YOY are simple and typically presented as percentages.
If you’re looking forward to understanding your company’s growth, divide the current year’s value by the prior year’s value and then take one away:
1. (this year) minus (previous year).
Differences between YOY and YTD
A 12-month change is examined using YOY. Year-to-date (YTD) measures change from the start of the year, which is typically January 1. While YOY can offer a point of comparison, YTD can offer a running total.
Wrap Up
Year-Over-Year (YOY) analysis is a useful technique for assessing development and performance, especially in the fields of business and finance. By comparing data from one year to the next, it offers an insightful viewpoint that enables a deeper comprehension of trends and development.
YOY analysis is a helpful perspective for investors trying to make selections as well as for businesses evaluating their financial health.
YOY measures indicate real growth or decline in the corporate world by minimizing the effects of seasonality and providing a reliable basis for comparison.
YOY calculations offer a trustworthy method of evaluation, making them an essential instrument in the field of finance whether analyzing a company’s sales, profitability, or economic indicators. So, embrace the YOY analysis’s power.
Keep reading: How Does a Money Market Account Work? 2023 Review
