Year-Over-Year (YoY): Complete Guide + Examples | FinanceTuts (2024)

You can’t be in the world of business, finance, or investing and not hear the term “year-over-year” (YoY) at least once a day.

But do you 100% understand what exactly it means and how to use it to your best advantage?

Keep reading to reveal the most important and useful aspects of YoY growth, including:

• 1.Real-life examples
• 2.Step-by-step calculation
• 3.Easy-to-understand definition and formula
• Bonus: Top 5 reasons why should you use YoYList Item #1

For instance, you would compare the first quarter of 2021 with the first quarter of 2020, because they share the same period length.

YOY can be positive, negative or zero – indicating increasing, decreasing or stagnating trend in the measured statistic.

Or you can use these alternatives of the formula that are even more simplified:

• YOY = (Present – Past) / Past
• YOY = (New Number – Old Number) / Old Number

Unlike standalone quarterly/monthly/weekly metrics, YOY gives you a clearer picture of performance without seasonal effects, monthly volatility, and other factors.

It also provides an objective view of the overall long-term performance.

Knowing your company’s year-over-year growth can be written proof that your company is succeeding and will continue to succeed. Calculating and showcasing your year-over-year growth can be beneficial for the following 5 reasons:

Arguably, the biggest advantage of year-over-year comparisons is that they minimize the effect of seasonality.

Many businesses operate on predictable seasonal cycles.

For instance, retailers experience peak demand during the holiday shopping season in the fourth quarter of the year (October to December).

In this case, the traditional “sequential” analysis that is designed to measure linear growth by comparing one month or quarter to the next (e.g., October 2022 vs November 2022; or Q4 2022 vs Q1 2023) would produce skewed results. And so would looking at the retailers’ financial metrics across one calendar year.

• If we compared the retailers’ results in Q4 to Q3 in the same year, it might appear the company is undergoing unprecedented growth.
• Similarly, a comparison of the Q4 to the following Q1 might indicate a dramatic decline when this could also be a result of seasonality.

Instead, year-over-year growth compares metrics to the same time period last year (e.g.; October 2022 vs October 2021; or Q4 2022 vs. Q4 2021) for a more accurate performance comparison that shows true growth/decline without the impact of seasonal extremes.

• Back to our retail example, if you compare this year’s fourth-quarter sales to last year’s Q4 sales, you can see whether the retail businesses are actually growing or just temporarily benefiting from the seasonal sales cycle.

YOY calculation can also smooth out volatility throughout the year to compare the overall net results.

Similarly to seasonality, business performance can vary over the course of a year. As a result, sequential analysis could make a business appear unstable.

In contrast, year-over-year comparison of specific months or quarters can make the analysis look more reliable to stakeholders.

In addition to mitigating the issue of seasonality and volatility, YOY offers another benefit: long-term performance analysis.

As the name suggests, YOY helps measure long-term growth year to year, not just month to month.

Consequently, it allows us to recognize trends over time and provides insight into whether short-term goals are leading to long-term results.

In business and finance, YOY is a popular way for owners, shareholders, managers, investors, lenders, business partners and other stakeholders of a company to evaluate its performance, growth patterns and trends, including the following financial metrics:

• Financial results, performance and health of a company (e.g., sales, revenue, profit margins, EBITDA, net income; ratios: liquidity / solvency / efficiency / profitability)
• Investment performance and returns (e.g., financial instruments, investment portfolios, funds, stock market, EPS)
• Key performance indicators (KPIs) that contribute to the bottom line of a business (e.g., shipping industry: number and speed of items delivered; healthcare industry: time and cost spent per patient; car dealerships: number of vehicles acquired and sold)

In economics, the economic situation of markets, countries and other entities are often analysed through the YOY lens.

• Economic indicators (e.g., interest rates, inflation, (un)employment, GDP, CPI)

Now that you have all the essential information about YOY, you might wonder:

What is the ideal year-over-year growth?

There is no one universal answer. What constitutes a good year-over-year growth rate is specific to each and every entity, depending on many factors, including:

• Internal factors: goals, business type, product mix
• External factors: industry, market, competition, economic environment