What Is Year-Over-Year (YOY)?
A frequently used financial comparison is the year-over-year (YOY) method. Using YOY, an analyst can compare two or more measurable events on an annualized basis.
Looking at YOY performance allows for gauging if a company's financial performance is improving, static, or worsening. For example, in financial reports, you may read that a particular business reported its revenues increased for the third quarter, on a YOY basis, for the last three years.
Explaining Year Over Year (YOY)
Year-Over-Year (YOY) Explained
YOY comparisons are a popular and effective way to evaluate the financial performance of a company and the performance of investments. Any measurable event that repeats annually can be compared on a YOY basis. Common YOY comparisons include annual, quarterly, and monthly performance.
- Year-over-year (YOY) is a method of evaluating two or more measured events to compare the results at one period with those of a comparable period on an annualized basis.
- YOY comparisons are a popular and effective way to evaluate the financial performance of a company.
- Investors seeking to gauge a company's financial performance use YOY reporting.
Benefits of Year-Over-Year (YOY)
YOY measurements facilitate the cross-comparison of sets of data. For a company's first-quarter revenue using YOY data, a financial analyst or investor can compare years of first-quarter revenue data and quickly ascertain whether a company’s revenue is increasing or decreasing. For example, in the third quarter of 2017, Barrick Gold Corporation reported a net loss of US$11 million, year-over-year. Further, the company reported net earnings of $175 million in the third quarter of 2016, which showed a decrease in Barrick Gold’s earnings from comparable, annual periods. This YOY comparison is also valuable for investment portfolios. Investors like to examine YOY performance to see how performance changes across time.
Reasoning Behind Year-over-Year (YOY)
YOY comparisons are popular when analyzing a company's performance because they help mitigate seasonality, a factor that can influence most businesses. Sales, profits, and other financial metrics change during different periods of the year because most lines of business have a peak season and a low demand season.
For example, retailers have a peak demand season during the holiday shopping season, which falls in the fourth quarter of the year. To properly quantify a company's performance, it makes sense to compare revenue and profits year-over-year.
It's important to compare the fourth-quarter performance in one year to the fourth-quarter performance in other years. If an investor looks at a retailer's results in the fourth quarter versus the prior third quarter, it might appear a company is undergoing unprecedented growth when it is seasonality that is influencing the difference in the results. Similarly, in a comparison of the fourth quarter to the following first quarter, there might appear a dramatic decline when this could also be a result of seasonality.
YOY also differs from the term "sequential," which measures one quarter or month to the previous one and allows investors to see linear growth. For instance, the number of cell phones a tech company sold in the fourth quarter compared to the third quarter, or the number of seats an airline filled in January compared to December.
Real World Example
In a 2019 NASDAQ report, Kellogg Company released mixed results for fourth quarter 2018, revealing that its year-over-year earnings continue to decline, even while sales have increased following corporate acquisitions. Kellogg predicts that adjusted earnings will drop by a further 5% to 7% in 2019, as it continues to invest in alternate channels and pack formats.
The company has also revealed plans to reorganize its North America and Asia-Pacific segments, removing several divisions from its North America segment and reorganizing its Asia-Pacific segment into Kellogg Asia, Middle East, and Africa. Despite decreasing year-over-year earnings, however, the company’s solid presence and responsiveness to consumer consumption trends mean that Kellogg’s overall outlook is favorable.