All About Year Over Year Analysis: Meaning, Formula, Calculation, Example, Metrics, and Many More

Businesses and corporations employ a multitude of methods to determine the growth in their performance over time. One such method is year-over-year or YOY analysis, which is mostly used to compare the performance variables of a business, like sales, net profit, earnings per share, etc. 

Being considered the most useful analysis for revenue data, YOY is one of the best analysis methods in cost accounting to evaluate a company variable’s performance. So, without any further ado, let’s directly jump over to YOY meaning and further learn about its uses, metrics, formula, calculation, example, benefits, and many more. 

What Does Year Over Year Mean?

Year over year is a commonly used financial comparison method to compare the performance of two or more comparable events on an annual basis. This comparison is mostly used to determine whether the company is witnessing a higher growth rate than previous events. It is used in corporate accounting to measure spikes or declines in revenues, profits, and other important business growth metrics. 

This analysis is also used for economic inspections to analyze the growth rate of countries with their previous development records. For example, in 2022, the US GDP was $25.46 trillion, compared to $23.32 trillion in 2021. This gives the US an economic growth rate of 9.18%.

How Year Over Year, or YOY Works?

The year-over-year comparison method takes crucial metrics into consideration like revenue, profit, sales, or customer growth from one time period with the same period from the previous year. This helps to understand the growth pattern, performance trends, and changes over time without any influence of seasonal fluctuations. 

While performing the YOY analysis, the following considerations should be carefully computed: 

• Time Consistency: Make sure that the comparison is made between the same months or quarters of the year so that the comparison is between similar conditions, regardless of the month or season.  

• Eliminating Seasonal Biases: Some companies witness seasonal variations in their business, such as higher sales during holidays. So, comparing the same periods in different years eliminates the seasonal effects. 

• Analysis of Long-Term Trends: The main focus of the analysis should be on long-term performance rather than short-term performance. This ensures that a sustainable growth pattern is maintained in the growth chart. 

Crucial Uses of YOY

Although the year-over-year analysis is famous for evaluating the growth of business variables over time, it also has several other uses. The following are some light-shedding uses of year-over-year analysis: 

• Evaluation of Business Performance: Year-over-year (YOY) analysis allows businesses to evaluate their overall growth and financial performance over time. Businesses can find trends, future problems, and create strategic decisions to enhance their operations. This is done by comparing important indicators like sales and revenue year over year. 

• Seasonal Changes: YOY analysis is helpful for industries with significant seasonal swings, such as retail, tourism, and agriculture. By looking at year-over-year information, businesses can identify seasonal trends and make adjustments to their operations.

• Investment Decision: Year-over-year comparisons are used by investors to assess the growth prospects of companies they are contemplating investing in. A continuous increase year after year may indicate a safe and good investment opportunity.

• Budgeting and Forecasting: The analysis helps businesses set reasonable goals and expectations for the upcoming years so that the business can make preparations to meet the requirements. 

Most Used Financial Metrics in Year Over Year

Most companies are very specific about their growth indicators and only consider impactful variables. Here are those influential financial variable metrics that are used for YOY analyses. 

• Cost of Goods Sold (COGS): Tracking the cost incurred on the production of goods to manage its gross margin.

• Sales Revenue: Concerned with how much total sales increased or decreased year over year. 

• Selling General & Administrative Expense: How the executives manage the corporate office expenses. 

• Earnings Per Share (EPS): Investors can use EPS growth rates to determine whether a company is becoming more or less profitable.

• Earnings Before Interest Taxes Depreciation and Amortization: It’s a standard measurement that banks use to evaluate a business’s ability to generate cash flow and pay off its debts.

Standard Year Over Year Economic Metrics

These are some common economic metrics to use in year-over-year analysis: 

• Gross Domestic Product (GDP): Comparison of the gross domestic product produced in a country with the previous year’s data. 

• Inflation: Concerned with the current inflation rate in an economy as compared to previous years. 

• Interest Rate: Increase or decrease in the average annual interest rate by comparing the yearly data. 

• Unemployment Rate: This includes a comparison of the workforce employed in the current year with the previous years. 

How to Calculate Year-Over-Year Growth?

Before understanding how the calculation of the year-over-year growth is computed, you need to look at the year-over-year growth formula: 

YOY Growth Formula

Year Over Year = [(Current year value of variable – Previous year value of the variable) / Previous year value of variable] × 100

YOY Calculation

After thoroughly reviewing the formula year over year, it is time to calculate year-over-year growth. Follow the steps below to get error-free YOY calculation. 

• First, calculate the difference between the current year’s value of the variable and the previous year’s value of the same variable for the same period. 
• Now divide the value that came out of the first step with the previous year’s variable value. 
• The last step is multiplying the whole value by 100 to find the percentage change.

Examples of Year Over Year Analysis

Just mentioning the YOY growth formula and explaining the calculation might not offer wholesome knowledge to the readers. So, here we have mentioned some examples to understand the calculation of year-over-year growth more precisely. 

1. XYZ Ltd., an agricultural fertilizer manufacturing company whose first year’s and current year’s revenue are accounted to be $1,20,000 and $6,00,000, respectively. They decided to evaluate the year-over-year growth rate of their revenue. So, let’s break this down. 

   Current year’s revenue = 6,00,000

   Previous year’s revenue = 1,20,000

Year Over Year = [(Current year value of variable – Previous year value of the variable) / Previous year value of variable] × 100

              = [(6,00,000 – 1,20,000) / 1,20,000] × 100 

              = [4,80,000 / 1,20,000] x 100 

              = 4 × 100

              = 400% growth in the yearly revenue

2. ABC Ltd. decided to perform an analysis of their business variables to evaluate the performance of their business over the periods. At first, they decided to analyze the performance of their net operating income. The records showed that the NOI of 2023 is $25 million and the NOI of 2022 is $18 million. 

Year Over Year = [(Current year value of variable – Previous year value of the variable) / Previous year value of variable] × 100

             = [(25 – 18) / 18] × 100

             = 7/18 × 100 

             = 38.9% growth in the net operating income

What is an Ideal YOY Growth Rate?

There is no ideal year-over-year growth rate for a company. The YOY growth rate varies depending on several factors, like the operational span of the business, seasonality, industry, customer behavior, and market disruptions. 

For example, newly set-up startups can witness a year-over-year growth of 100% or even more. But it has been seen that a well-settled business can only go between 20% and 50%. Remember that the growth percentage highly depends on the industries, so these percentages might not be true for other businesses. 

Benefits of YOY Analysis

Performing and sticking to the year-over-year analysis for a longer period not only makes proper tracking of the business growth variables but also offers a variety of positive effects as mentioned below. 

• Sets Benchmarks of Performance: Using YOY analysis allows businesses to compare their operational performances with their competitors and average percentages of the industry. It helps to set their personal benchmarks in comparison to the industry standards. 

• Helps in Finding Growth Opportunities: Performing year-over-year analysis can also expose the growth opportunities of a business for future years. With proper analysis of the records, businesses can identify the factors and conditions where the performance is optimal. 

• Pinpointing the Business Challenges: A declining YOY indicates the underperformance of a business. However, a careful evaluation of the YOY rate helps in locating the challenges faced by the business. 

• Assists in Decision-Making: By performing YOY analysis on a yearly basis, business owners get an overview of their yearly performance. This overview is used as the base of the decision-making process for improvement. 

• Performance Evaluation: While covering all the other benefits, we can’t overlook that it helps in performance evaluation—the primary use of YOY analyses. It allows businesses to evaluate their performance in comparison to the previous year’s records.  

Alternative Analysis Methods of YOY 

As the year-over-year analysis method compares the data between two years, several other alternatives are used for similar purposes. The following are some of these methods that are commonly used by businesses: 

• Month Over Month (MOM): This analysis method is used to get a strong comparison of 2 same months of different years. It is used to identify short-term fluctuations and changes in trends. 

• Quarter Over Quarter (QOQ): Considered the best analysis to evaluate the seasonal changes in the business performance, the quarter-over-quarter methods take the same quarter of the different years into the accounts. 

• Compound Annual Growth Rate (CAGR): This method identifies the yearly growth rate of an investment over a specific period. Mostly used for comparing the data for a longer period of time. 

• Moving Average Growth: It offers a smooth representation of data fluctuations by calculating the average over a specific number of periods. 

• Year-To-Date (YTD): This analysis method compares the data between the two starting points of different years. For example, the starting point of the current year and the starting point of the previous year. 

Bottom Line 

The scope of year-over-year analysis is not only limited to the financial variables of corporations but can be employed in different contexts like economic analyses and investment decisions. Due to its mostly use in corporations for comparing performance over a period of time, the year-over-year analysis is famous in business associations and enterprises.