An individual calculates year-over-year percentage change, or YOY change, by evaluating two or more measurements and comparing them to the same period of time in a previous year.
Year-over-year change is calculated on performance over a 12-month period or more. It compares results from the current year to a previous period of time, which is usually evaluated on a monthly or quarterly basis. To perform this equation, one subtracts numbers in the previous year's time period from the same period's total of the present year. If the number is positive, it is considered a net gain. A company that sold 50 swimming pools in the current year and 40 in the past year has gained revenue. Year-over-year growth rate is then determined by dividing the previous year's difference from the total. In this case, that would be 40 divided by 10, which becomes .25, or 25 percent.
Benefits of YOY Analysis
YOY measurements are helpful for evaluating a change in finances or the economy over a set period of time. A financial analyst, for instance, might determine a company's financial performance by using the YOY change to evaluate the company's performance by comparing its revenue during the first quarter of the current year to the first quarter of previous years. In doing so, the analyst can determine whether or not the company's revenue has been increasing or decreasing over that period of time. In addition to businesses, the YOY method evaluates performance in investment portfolios.
A benefit of YOY analysis is that it eliminates seasonality, which refers to variations in sales and revenue throughout the year based on consumer demand. Sales, profits and other factors of a company's performance can wax and wane over the course of the year in a pattern of peaks and troughs. Many businesses, for example, see a surge in consumer goods sales during the holidays, which means that they have higher fourth-quarter revenue than revenue accumulated during other parts of the year. To get the most accurate understanding of a company's performance, analysts usually look at revenue trends over a period of multiple years. They also compare year-to-year changes by comparing the same time periods of those years. An analyst might come up with an inaccurate value for a company's financial performance, for example, if he or she compares revenue in the fourth quarter of one year to revenue in the second quarter of past years.
Cons of YOY Analysis
One disadvantage of YOY measurement is that it does not consider monthly growth rate, which also factors into the bigger picture of economic health. In addition to comparing monthly growth rates, analysts sometimes compare quarterly trends in a process called quarter on quarter change, or QOQ. This technique measures performance in the same way that YOY change does, but it narrows down values to specific quarters during the year.
In addition to helping analysts gauge financial performance at the micro level, YOY change is also a valuable method for analyzing economic growth. Economists analyze the year-to-year change of a country's economy to determine its overall financial health. This way, they can determine whether or not a country is producing more goods and services than in the past.