YoY is a financial term that means year-over-year. Stock market investors use year-over-year comparisons of financial metrics to assess performance. For example if revenues increase year-over-year it shows performance has improved.
Year-over-year comparisons can be made for financial statement metrics, such as revenues, expenses, assets, and liabilities, as well as percentage returns in share price and just about any other financial metric that jumps to mind.
It’s especially important to use yoy comparisons when you are considering investing in a company that has seasonal spikes in performance. For example, a company that installs swimming pools may enjoy a boost in revenues over the spring and summer seasons compared to the fall and winter seasons.
If you compared revenues during summer with those during winter, it would be akin to comparing apples to oranges. However, if you were to compare revenues earned this summer to those earned last summer, you would have a more accurate yoy performance comparison by stripping out the seasonality swings.
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How To Calculate YOY Growth
YOY growth can be a positive or negative number. If a share price increased from $100 on Jan 1 last year to $120 on Jan 1 of this year, the yoy growth is 20%.
But if the share price declined from $100 on Jan 1 last year to $80 on Jan 1 of this year, the $20 loss in share price would be described as negative yoy growth, or negative growth of 20%.
To calculate yoy growth, simply divide this year’s financial metric by last year’s financial metric and subtract 1.
So, in the example above, $120 divided by $100 is equal to 1.2 and after you subtract 1, you end up with 0.20 or 20%.
Similarly, when you divide $80 by $100, you end up with 0.80 and after subtracting 1, you end up with -0.20 or -20%.
Financial Tip: Make sure that you use equivalent dates on each year.
If you wish to calculate yoy growth in share price from one year to the next don’t use different dates, such as Jan 1 this year but Feb 1 last year. The only exception is if you were comparing performance from one year to the next using Feb 29 of a leap year as the benchmark starting date.
When Should You Use YOY Comparisons?
Anytime you want to gauge performance of a financial metric while stripping out seasonality effects, yoy comparisons are useful.
A company like Amazon or a retailer like AutoZone will naturally have spikes and troughs in buyer demand.
Around the holiday season in the fourth calendar quarter of the year, a surge in consumer purchasing takes place.
If you were to compare revenues from the fourth quarter with those of the third quarter in a retail company, you might falsely deduce that the company is growing massively.
Equally, if you were to compare revenues from the first quarter with those of the fourth quarter, you might come to the wrong conclusion that revenues were plummeting.
In reality, the spike in fourth quarter revenues stems from a predictable spike in consumer demand for goods over the holiday season and so a more accurate performance comparison would be to examine how revenues fared from one quarter this year to the same quarter last year.
You should compare fourth quarter revenues this year with fourth quarter revenues last year or first quarter revenues this year with first quarter revenues last year for a like-for-like revenue comparison.
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How Investors Use YOY Growth Comparisons
Let’s pretend for a moment that you are a Wall Street research analyst tracking performance of Alphabet stock, better known as Google.
You probably track dozens of financial metrics but a couple of key metrics are the number of clicks and the average cost per click.
If either of these key metrics rises from one year to the next with all else staying the same then the revenues will increase.
What investors often care about though is not only how these metrics compare from this year to last year, or yoy performance, but the pace of change of the growth.
For example, if the number of clicks increases 25% yoy this time last year but only 10% yoy this year, then an analyst may be concerned that the rate of growth is slowing, even though the yoy growth is still positive.
Should Investors Compare YoY or QoQ?
Just as year-over-year growth can give investors insights into how a financial metric has performed from one year to the next, so too can quarter-over-quarter, or QOQ, tracking provide insights into performance from one quarter to the next.
A company that is immune to seasonal swings in consumer demand is a good candidate for quarter-over-quarter performance comparisons.
For example, Facebook users regularly log in each day whether it is spring, summer, fall, or winter. Some seasonal effects may take place over holiday periods, but largely the user base will log in regularly and click on ads from one day to the next without large quarterly spikes or dips.
If you want to compare how Facebook users are growing or revenues are rising (or falling) over a shorter period than a calendar year, QOQ numbers can provide useful insights.
The financial calendar quarters are broken down as follows:
|Q1||January, February, March|
|Q2||April, May, June|
|Q3||July, August, September|
|Q4||October, November, December|
Quarterly Earnings Reporting
Each quarter, publicly traded companies report earnings. Management teams file 10-Q reports with the Securities and Exchange Commission, or SEC.
Financial statements are reported in these 10-Q reports and contain detailed information about financial metrics over the prior 3 month period.
A 10-K report is filed annually also, and it accounts for the first three 10-Q reports as well as the final quarter’s report.
Typically, the 10-K report is more detailed than the 10-Q reports, and so financial analysts will use it as the basis for making ratings recommendations.
Once a 10-K or 10-Q is reported, financial analysts will update spreadsheets, known as financial models, to account for the latest financial metrics, and these are generally used to make valuation projections, often using methods such as discounted cash flow forecast models.
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