What does year-over-year (YOY) mean?
If you’re a small business owner, you might hugely benefit from year-over-year (YOY) performance analysis. If you’re an investor, you might learn a lot from paying attention to YOY growth figures. So let’s get to grips with YOY, from how to calculate to all the most significant advantages of the metric.
What does year-over-year mean?
If you’ve come across the acronym “YOY” but are still in the dark about what it means, it’s probably more straightforward than you think. YOY simply means year-over-year.
In financial terms, YOY is a measurement metric used by investors, financial advisors, and business owners. It takes data points from one financial year and contrasts them with the same data points from the next to see whether a company is improving, worsening, or remaining on the same level from one set of 365 days to the next.
On a broader scale, the YOY metric can also reveal whether a country is growing, declining, or stagnating, looking at figures like GDP from one year to the next.
While month-to-month financial comparisons can lack accuracy, often affected by seasonal trends, year-over-year financial comparisons are the gold standard for many financial analysts and businesses. As a result, they’re considered more informative and meaningful and frequently referenced in annual, quarterly, and monthly performance reports.
Most companies would prefer to look at revenue for January 2022 and January 2023, comparing differences and looking for signs of growth or decline, as opposed to attempting to compare December 2022 with January 2022, two vastly different months.
If you’re a business owner who wants to evaluate the overall state of your company in terms of financial performance, looking at YOY is a quick way to achieve that (though, of course, more metrics should be considered alongside YOY for a robust, holistic approach).
If you’re an investor – or someone looking to start investing soon – and want to explore a business’s financial performance before possibly becoming a shareholder, you’ll also find YOY reporting figures helpful.
How do you calculate YOY growth?
Even when a company doesn’t detail its year-over-year growth directly, you can figure this out relatively quickly for your chosen timeframe – providing you have the raw data for both years. This often means knowing a company’s revenue in a particular year, month, or quarter. But it could also mean looking at any other measurable, comparable data set to determine a growth rate. Here are two examples:
Example one – You’re a company owner hoping to compare January 2022 and January 2023. In January 2022, your revenue for the month totaled $4,000. In January 2023, it was $5,800. To determine your growth rate, you divide 2022’s figure by the difference between these figures. Then, you multiply this number by 100 and come out with a final percentage YOY growth rate of 45 percent.
Example two – You’re a hopeful investor looking to compare a company’s performance in Q1 of 2022 with its Q1 of 2023. You gather the figures – $432,600 and $487,660, respectively. To determine the company’s YOY growth rate, you do the same calculation outlined in example one. You calculate the growth rate to be 12.73 percent.
Of course, there are times when YOY figures won’t reveal growth. Generally speaking, though, this will be evident before you do any further calculations, such as the growth rate calculations above. If revenue was $100,000 in 2022 and $80,000 in 2023, it’s clear that year-over-year, things are declining.
The benefits of YOY
There are many reasons why YOY metrics are beneficial. For one, calculating YOY doesn’t require complex software or immense expertise, so it’s simple for a small business owner or investor to figure out (provided they have the correct data to calculate with).
YOY growth rates are also easy-to-interpret percentages. Great rates can make a company stand out to investors, especially newer ones, as they’re an understandable, objective company performance measure based on facts and figures.
For business owners specifically, YOY calculations are beneficial for tracking growth and pinpointing, tracking and resolving problems causing stagnation or decline. When applied on a micro-scale, YOY data can identify seasonal trends and effectively flag areas for improvement and resolution.
Why is YOY important?
YOY growth, especially when continually sustained, might translate to investment success. If an investor can see that a business’s revenue has been increasing year-over-year for the last seven years, they’ll know this will likely be a steady investment. This might hugely appeal to those with a lower appetite for risk.
Unlike month-over-month data, year-over-year data accounts for seasonality. To use an extreme example, a Christmas tree farm will report very different figures in December and January, negating the value of month-to-month comparison. The year-over-year comparison is more direct, aware of, and accounting for seasonal changes.
Many different data points can be applied to this simple, replicable format. We’ve looked at revenue and GDP (for countries)), but there are still more ways to apply the YOY format to all business areas. YOY calculations are a breeze to replicate.
When used effectively by a company, YOY calculations can allow for significant improvements. For example, if looking at YOY rates allows a company to pick up on an area where sales are slipping/a month where things are relatively slow, moves can be made to rectify these issues before they grow in scale and complexity.
Companies that report YOY rates demonstrate high transparency, making them more appealing to customers and investors. When a company is clear about the revenue they’re pulling in and how that compares to previous years, many consumers and investors appreciate the honesty.
Hopefully, you now have a strong sense of why so many financial advisors use YOY measurements when assessing whether a company would be a good investment for a client – and why so many professionals are attentive to YOY in their own businesses.
If you’re ready to take your investment journey to the next level or simply boost your portfolio, a financial advisor can help you get there. Find your perfect financial advisor with Unbiased.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.