Year-over-year
What is year-over-year (YOY) comparison?
Year-over-year (YOY) is a financial comparison used to compare the current period’s revenue, profit or any metric on an annualised basis.
Publicly listed companies publish their earnings on a quarterly and yearly basis. Most earnings results compare metrics on a year-over-year basis and on a quarter-over-quarter (QOQ) basis.
YOY comparison is also considered the benchmark when examining investment portfolios of an investor. YOY is valuable when gauging the performance of an index, stock, commodity and cryptocurrency over time.
What does year-over-year mean?
With regards to company earnings, a YOY comparison helps investors evaluate whether the financial health of a company is improving or worsening over time. By comparing revenues or profits for a given quarter on a YOY basis, investors get a more accurate picture when considering consistent underlying conditions.
For example, when a retail company is reporting its earnings for the quarter ended 31 March, a comparison of its reported revenue with the preceding December-ended quarter is not fair.
The last three months of a calendar year are considered a holiday shopping season due to special occasions like Halloween, Thanksgiving and Christmas. With consumer sales surging during year-end festivities, sales from a December quarter will most likely outperform sales from a March quarter due to the former’s favourable business conditions.
What is year-over-year (YOY) growth?
Investors need to be mindful of the changing business conditions when using YOY and QOQ comparison. The emergence of Covid-19 and related stay-at-home restrictions have given investors reason to think twice before following the norms.
For example, if we compare the revenue of a hotel business in any given quarter of 2020 versus the corresponding period in the previous year, the comparison will not be fair because lockdowns and social distancing restrictions were non-existent in 2019.
Along the same lines, investors should be aware of low base effects. Let us presume a company was reporting average full-year revenue of $10m for the last five years up to 2019. In 2020, the company’s revenue slumps to $1m due to Covid-19 restrictions.
Let’s say, the company recovers in 2021 and reports a full-year revenue of $9m. This translates to an increase in revenue of a whopping 800% on a YOY basis, even when absolute revenue figures are below pre-Covid levels.
YOY growth formula
If you are wondering how to calculate year-over-year growth, it is fairly straightforward.
Subtract the current period’s figure (X) with the prior year’s value (Y), and divide the difference (X-Y) by the year-ago figure (Y). Multiply the answer by 100 to get the result in percentage terms.
Year-over-year use case example: One-time items
One-time expenses or one-time profits reported by a company can make percentage growth/contraction readings less accurate for the investor.
One-time items can inflate revenue or profit figures for a given period. These one-time items may be included as restructuring charges, asset impairment charges, gains from asset divestments, increased expenses due to merger and acquisitions, legal costs and fees, among others.
More recently, Tesla reported impairment charges of more than $100m due to the value of bitcoin going below Tesla’s purchase price. On 7 February, Tesla reported that the carrying value of the company's digital asset holdings was $1.26bn, as of 31 December 2021.
If Bitcoin’s price surges to a value above Tesla’s average purchase price in the future, the impairment charges reported on 7 February 2022 will become redundant.
