What does YoY (year-over-year) mean?
In financial analysis, YoY stands for Year over Year. This refers to a type of calculation that compares two or more pieces of information from different time periods. These measurements are typically applied when analysing economic or financial data.
- YoY stands for Year-over-Year, a calculation that compares data points from one year to the next
- This method is useful in informing business decisions and analyzing growth
- YoY helps in determining what is and isn’t working in a business, in marketing a business, and in understanding seasonality
What is the YoY method used for?
The YoY method is used in business scenarios and should be considered when looking through your annual reports. These calculations are helpful in many ways, including the following
Showing you what works in your business
Year-over-year calculations show you what is working when it comes to business performance. Looking at growth over the year helps you determine whether changes you made have positively or negatively affected your business.
Pitching your business to others
YoY helps when it comes to selling your business to others. By showing a strong YoY, it markets your business as more profitable and attractive, whether it be for investors, employees, or partners you want to work with.
Understanding seasonal changes
Many businesses are affected by seasonality. For example, a swimsuit company sees peaks in sales in summer, whereas sales may be lower during colder weather. Thus, in these types of businesses, it can be useful to use YoY so you can see an average growth over the year rather than volatile changes over certain months.
How do you calculate YoY growth?
Now that you know what YoY means, how is growth calculated? Follow these three simple steps and you’ll be able to easily apply YoY:
- Collect the data you need
To get started, you need to determine what data points you need. You’re going to need monthly data for the time period you are looking at and the same data for a time period one year prior to or after it.
- Determine whether there is a loss or growth
Take the later month’s growth number and subtract the previous year’s growth month from it. If this difference produces a negative number, this means there is a loss, if it is a positive number, it indicates growth.
- Compute the growth rate
Take the difference calculated in the previous step and divide it by the previous year’s total number. This quotient is the growth rate for your 12-month period. Multiply this by 100 to get a percentage rate.
To put it into perspective, here is an example with a positive rate:
- We want to compare the sales from February 2022 and February 2021 for a small business. Imagine the February 2022 sales were $1100, and the February 2021 sales were $980.
- We want to subtract $980 from $1100, this gives us a year-over-year difference of $120.
- Divide $120 by $980 to get the growth rate of 0.1224. Multiplied by 100, this gives us a percentage growth rate of 12.24%.
Here is another example, this time with a negative rate:
- We want to compare the number of visitors to a website from this year and last year. The number of visitors in March 2020 was 5000, and in March 2021, the number of visitors was 4500.
- Subtracting 5000 from 4500, we get a year-over-year difference of -500.
- Dividing -500 by 5000, we get a growth rate of -0.1. Multiplied by 100, this gives us a percentage growth rate of -10%.
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Real-life applications of Year-over-Year
YoY is a very practical calculation that informs business decisions. Taking the two previous examples we used for calculations, let’s consider these as real-life situations.
Let’s say you started a small business selling digital portraits last year as a side hustle. After working on it part time for a year, you want to see if you should take it up full time and quit your day job, allowing you to focus your hours on growing your brand. Among other considerations, you look at your YoY growth rate, which as we saw was 12.24%. This growth rate shows that from working on your business just part time, you are seeing sizable growth. You might consider that putting more into the business could further increase growth, allowing you to eventually focus on it full-time.
You are in charge of managing a website and this year you re-strategized in terms of your budget. Instead of focusing on SEO, you placed a higher budget into social media ads that link to the website. Since it has been one year since you made the budget change, you want to know if this has increased website traffic. Given that nothing else has changed in your strategy, looking at YoY can give you a good indication of whether SEO or social media has improved website traffic more. In the example we did before, we can see that there is a -10% YoY growth rate, meaning that focusing on SEO was driving more traffic.
What’s the difference between YoY and YTD?
YoY and YTD (year-to-date) are often both used when conducting business calculations, but they are not interchangeable. YoY looks at change over a 12-month time period. YTD on the other hand, looks at a change from the beginning of the year (typically January 1st) to a current date (i.e., today’s date). While YoY always has a fixed time period of 12-months that you look at, the time period for YTD calculations are always different depending on what the current date you are looking at is.
Alternative comparison models
YoY is just one way to compare data over different time periods. Some other methods include using month-over-month, quarter-over-quarter, and compound growth rates.
Similar to year-over-year, month-over-month compares data over a specified time period. Instead of comparing by years, it compares from a previous month to a current month, but the process to calculate this rate is the same.
Again, like month-over-month, this is a similar idea to year-over-year, but this time, comparing quarter to quarter data points. Calculating quarter-over-quarter is the same as year-over-year and month-over-month, the only thing that is different are the pieces of information gathered and used.
Compound growth rates
Compound growth is defined as the average rate of growth for an investment over a specified year period. The most common rate used for this is the Compound Annual Growth Rate, or CAGR, which indicates the return rate on an investment from its initial amount to a certain ending balance.
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