YoY configure for Year over Year and is a class of financial analysis helpful for comparing time series data. The YoY analysis allows analysts to estimate changes in the quantity and quality of a particular business aspect. In the financial world, investors usually compare the performance of financial instruments year-over-year to determine whether they are performing as expected. This analysis is also very useful for analyzing growth patterns and trends. Economic analysts also often use this method to analyze the country’s overall state and economy. For example, the YoY approach shows that Japan’s GDP increased by 2% in 2016 compared to 2015, while analysts previously predicted an increase of only 1.8%.
A year-over-year ratio is an important tool for assessing the direction in which a company’s business performance is moving. Are sales increasing or decreasing? What about the debt? Is the bottom line stable amid the significant impact of industry and economic trends?
Any financial item can be assessed on a year-to-year basis, as long as it can be measured in a standard period.
Year-over-Year growth rate
The most common use of Year-Over-Year data is Year-on-Year growth or YOY growth.
It is a yearly conversion of a company’s data, measuring two data periods over the same period, specifically showing how that data has changed.
Interpreting Year-over-year Growth Analysis
The main advantage of the year-over-year analysis is how easy it is to track and compare growth rates across periods. Which, when annualized, can eliminate the effects of monthly changes.
Furthermore, if past results reflect the entire economic cycle, the periodic pattern will also become evident. These two basic rules are intuitive, but before we reach a definitive conclusion, we need to delve deeper into the company’s growth trajectory and identify the core drivers behind the change.
- Positive year-over-year → growth
- Negative assessment of the decline in growth → year on year
To give a simple example, let’s look at a company whose sales growth has been 5% in the past year. And this year’s growth rate is only 3%.
Why use year-over-year?
Let’s take an example and understand it. The store manager Adam, who sells gift cards, wants to know if his business went well this Christmas season. If you compare sales in December with sales in November of the previous month, you will not be able to understand your store’s performance accurately.
Year-over-year (YoY) means “comparing the company’s current performance with the same data of the previous year.” It means comparing financial data for a year to the same period of the previous year. Why is it that analysis is often used to evaluate companies’ performance?
When comparing a company’s performance against past performance, the purpose is to provide valuable and useful data. The problem is that performance analysis is often complex. To extract valuable data, you need to eliminate the impact of various factors. Year-over-year data can help control one of the most confusing variables for a company: seasonality.
Precise and accurate performance
The year-over-year analysis provides a more accurate picture of monthly revenue growth, especially for seasonal products and services. By comparing the same month of different years, an accurate comparison can be made, regardless of seasonal characteristics. In addition, the same-month-on-year growth in the previous year provides a clearer and more accurate picture of the long-term results of business efforts than using a monthly matrix. And with HashMicro’s most integrated ERP software, you get fast and accurate corporate data.
Simple tracking and counting
The second benefit of the year-over-year comparison is that it is easy to track and calculate data. YOY provides a simple calculation. This calculation is suitable for business analysis that is easier to understand for SMEs. In addition, year-over-year results are in an easy-to-understand percentage format to get a more understandable result. Comparing a given month in this calculation results in smoother data that appears more reliable for investors.
Alternative to Year-Over-Year Analysis
Instead of the same month-to-month ratio in the previous year, you can also see the following time series data:
- Quarter-to-quarter ratio
- The compound rate of growth
Why do companies use reports from the previous fiscal year?
A single month’s sales would have little meaning in a business if there were no context. Selling $200,000 in May may be surprising news or a big disappointment, but it won’t be very meaningful if there is nothing to compare. But if last year’s May sales were $400,000, it would be clear that sales were down 50% from the same month last year. Businesses use YOYs to understand how sales decrease or increase each year and compare monthly or quarterly results to the same period in the previous year.
If you use the YOY model too commonly, if you track it only for the whole year, you might miss important monthly statistics unless combined with other reporting methods. Year-over-year tracking is a great comparison tool, but it should not be limited. You should always track month-to-month results as well.
If the data indicates that the growth rate for a given month is negative, the continuous results will be distorted, and the information will be denied. In summary, a Year-to-Year tracking model is a good tool for tracking how your business is financially functioning on an annual basis. When used properly, it allows you to quickly get an overview of growth without the seasonal impact on the real results. It’s a great tool to make sure you’re on the right path if you’re new to the compelling and stormy world of enterprise and finance.
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