What is YoY?
YoY stands for Year over Year and is a type of financial analysis that’s useful when comparing time series data. Analysts are able to deduce changes in the quantity or quality of certain business aspects with YoY analysis. In finance, investors usually compare the performance of financial instruments on a year-over-year basis to gauge whether or not an instrument is performing expected. This analysis is also very useful when analyzing growth patterns and trends.
Economic analysts also commonly use this approach when analyzing countries and their overall economic situation. For example, the YoY approach finds that Japanese GDP has grown 2% in 2016 as compared to 2015, while analysts previously only projected an increase of 1.8%
YoY and seasonality
The YoY approach may also be useful in analyzing monthly revenue growth, especially when the sources of revenue are cyclical. This allows an apples-to-apples comparison of revenue, instead of comparing revenue month-over-month where the may be large seasonal changes.
For example, in the relatively seasonal chocolate industry, it would be more useful to compare revenue growth between December 2016 and December 2017 (where sales are high due to winter sales), as opposed to comparing March 2016 to February 2016, where holiday sales have started to slow. By comparing months in a year over year fashion, the comparison becomes more relevant than two consecutive months that are affected by varying seasonality or other factors.
Common YoY financial metrics
Here is a list of the most commonly used financial metrics for conducting a year-over-year comparison:
- Sales revenue – how much have sales increased or decreased year over year
- Cost of Goods Sold (COGS) – how well has the company been able to manage its gross margin
- Selling General & Administrative expense (SG&A) – how well have executives managed their corporate office expenses
- Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) – a measure of operating profit and proxy for cash flow
- Net Income – comparing the bottom line of the business over time
- Earnings Per Share (EPS) – looking at the bottom line on a per share basis
Common YoY economic indicators
Here is a list oof the most commonly used metrics for conducting a year-over-year comparison:
- Inflation – what is the trend in inflation
- Unemployment rates – what is the workforce participation rate trending to
- GDP – how much gross domestic product is a country producing
- Interest rates – are we in a rising or falling interest rate environment
Alternatives to YoY analysis
As an alternative to YoY analysis, an analyst may also want to look at other time series data such as:
- Compound growth rates
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Example of YoY analysis
Here is a detailed example of YoY analysis in action. This example comes from a financial modeling exercise where an analyst is comparing the number of units sold in Q3 2018 to the number of units sold in Q3 2017.
Let’s break down the YoY analysis step by step.
There were 506 units sold in Q3 2018 and 327 units sold in Q3 2017. To compare the two we take 506 and divide it by 327, then subtract one. The result is a 55% increase in units sold on a year over year basis between Q3-2018 and Q3-2917.
We hope this has been a useful guide to understanding what YoY (year over year) analysis is and why analysts perform it. To continue building your corporate finance knowledge base we highly recommend these additional resources: