Year – Over – Year: What does YOY mean?
Year-over-year is a calculation that compares two years but for the same period. Period means a month or quarterly. This is YOY meaning is calculating the change in percentage of the past year or 12 months.
YOY or Year-over-year is very effective to calculate growth for two reasons.
1. Removes the effect of the season – If your revenue rises by 20% last month. Now check out the income of last year for the same month. It could be that every year this month your revenue always rises. If your revenue rises by 35% this month every year then your YOY is down. Your business is not doing well
2. Discerns Long-Term Trends – assume your business is growing well and by 2% every month. But it was 3% every month for last month. Then your business is going down when Year-Over-Year comparison is done.
So it is necessary to check what kind of comparisons are done for the financial reports. Is the comparison done for the complete last year that is 12 months or is it statistics of quarterly, monthly, weekly or daily bases? Even it is necessary to see whether the calendar used is year calendar or financial year calendar.
Let’s see some pros and cons of YOY
● Negates seasonality as it compares a time period.
● It helps to compare net results for the complete year.
● A spreadsheet or financial calculator is nor requires.
● Easy to calculate.
● The result is in percentage which makes the comparisons easier.
● Sometimes gives meaningless result if a time period is negative.
● If compared yearly then monthly problems can arise.
● It is necessary to use the information with other metrics.
There are 3 steps to calculate Year – over – year Growth rate, what you need are two numbers and one calculator.
Step 1 – Last year’s number is to be subtracted by this year's number. This will give you the difference. If the number is positive then it means that year-over-year has profit, not a loss. For example, the sale of this year is 125 vehicles and last year 110 vehicles were sold. So this year 15 vehicles are sold more than last year.
Step 2 – Now divide the difference. That is divide 15 by 110. This will give the growth rate of YOY.
Step 3 – now give it the percentage formula that is 15 / 110 = 0.13 you can say 1.3%
Points to remember
● YOY helps us compare the growth of last year you can say the past 12 months.
● When you wish to control the effect of the volatility of two companies then Year over Year is a perfect statistic.
● Though it is very helpful remember it may leave some important information that will give you a poor vision of the complete picture.
● This will be very useful to see the signals of economics going down.