YoY Growth Meaning in Share Market

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Understanding YOY

YOY comparisons are a popular and effective way to evaluate the financial performance of a company and the performance of investments. Any measurable event that repeats annually can be compared on a YOY basis. Common YOY comparisons include annual, quarterly, and monthly performance.

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Logic behind Year-Over-Year

The popularity of analyzing an enterprise’s performance is enhanced since YOY comparisons aid in mitigating seasonality, which is an aspect that can affect many businesses. Fiscal metrics such as profits and sales fluctuate during different times of the year. In view of that, a majority of commercial lines have a low and peak season.

For example, the holiday shopping phase falls in a year’s fourth quarter. During that time, retailers enjoy a peak demand period.

In order to appropriately quantify a corporation’s performance, it is fundamental to compare profits and revenue year-over-year.

If an investor examines the results of a retailer in the fourth quarter against the previous third quarter, it may seem a company is going through unparalleled growth. Nonetheless, it is seasonality that is impacting the results’ differences.

Major Takeaways:

  • YOY assesses the performance of your business.
  • The YOY growth rate reveals the percentage variation from the previous 12 months.

So, YoY comparisons are just for seasonal investments?

Seasonal changes in earnings aren’t the only reason investors should pay attention to YoY comparisons.

Don’t just look at YoY figures from last year to the current year. You should also make YoY comparisons from the current year to two years ago, three years ago, five years ago. YoY comparisons over a number of years can show you how an investment performs over a lengthy period of time and in different types of markets.

“It’s crucial to evaluate an investment or fund over a full market cycle,” Cavallaro says. “Look at how it performed when the economy was doing well and how it performed when the economy was in a recession.”

The most successful investors have a long-term plan for investing—and it’s important to think long-term about the performance of your investments. Because the nature of the market is to fluctuate, it’s a good idea to see how a certain investment has performed in the past during bear and bull market conditions (in simple terms, the down and up periods of the stock market). Then you’ll have a better idea of what you can expect from that investment in the future.

Reasoning Behind YOY

YOY comparisons are popular when analyzing a company’s performance because they help mitigate seasonality, a factor that can influence most businesses. Sales, profits, and other financial metrics change during different periods of the year because most lines of business have a peak season and a low demand season.

For example, retailers have a peak demand season during the holiday shopping season, which falls in the fourth quarter of the year. To properly quantify a company’s performance, it makes sense to compare revenue and profits YOY.

It’s important to compare the fourth-quarter performance in one year to the fourth-quarter performance in other years. If an investor looks at a retailer’s results in the fourth quarter versus the prior third quarter, it might appear that a company is undergoing unprecedented growth when it is seasonality that is influencing the difference in the results. Similarly, in a comparison of the fourth quarter with the following first quarter, there might appear a dramatic decline, when this could also be a result of seasonality.

YOY also differs from the term sequential, which measures one quarter or month to the previous one and allows investors to see linear growth. For instance, the number of cell phones a tech company sold in the fourth quarter compared with the third quarter or the number of seats an airline filled in January compared with December. 

QoQ stands for quarter-over-quarter

QoQ is just like YoY, except it stands for quarter-over-quarter. It measures the sequential growth/decline in three months, compared to the previous three months.

For example, if a company has 10 million paying subscribers at the end of Q3, but 12 million at the end of Q4, that indicates QoQ growth of 20%.

Examples

A company had $110 million in revenue in 2018, compared to $100 million in 2017. In other words, revenue increased by $10 million compared to the previous year, which amounts to a 10% YoY revenue growth.

Another company had $50 million in earnings in the fourth quarter of 2018, but they had $100 million in earnings in the fourth quarter of 2017. This means that earnings decreased by 50% year-over-year.

Here's an example of how Facebook's financial performance changed YoY in 2018:

It's also common to compare quarterly financials on a YoY basis — as in, whether financials improved or worsened compared to the same quarter a year earlier.

For example, Tesla's (TSLA) revenue increased from $7,226 million in Q4 2018 to $7,384 million in Q4 2019. That is YoY growth of 2.1%.

Looking at a quarter's financials compared to the same quarter a year earlier is very useful because it helps eliminate fluctuations in the numbers due to seasonality.

If you were to compare a retailer's Q3 and Q4 sales, you might think that the company grew a lot in Q4. But this quarter includes the holidays, which tend to lead to a lot of sales each year.

Because of this, it makes much more sense to compare quarterly financials on a YoY basis. It gives a more accurate view of whether the numbers are growing or declining.

YoY Growth Simple Example

Let’s assume a company called ‘ABC Ltd’ has earned profit of ₹ 10,000 in Q4 2019.

In Q4 2020, the company has earned profit of ₹ 12,000.

How much is the year on year profit?

Q4 2020 – Q4 2019. 12000 – 10000 = 2000.

The company has shown growth in profit.

To get percentage, let’s apply the formula:

[ (12000 – 10000) / 10000 ] * 100 = 20%

The YoY growth of ‘ABC Ltd’ is 20%.

How Does Year-Over-Year Work?

Many government agencies will report economic data using year-over-year calculations to give context to how the economy is performing over the past year. Year-over-year calculations are easy to interpret, and they allow for easy comparison over time, making them helpful.

Some of the main economic data reported this way are inflation numbers, GDP, unemployment rates, and interest rates. Businesses will also use year-over-year data when they’re calculating key statistics that are helpful to investors.

Net income, revenue, and sales are frequently quoted as a year-over-year measure, and can be found on a company’s financial statements.

Economic data is often shown using year-over-year calculations, but government agencies may also choose to take a monthly growth rate and annualize it. Annualizing data means taking the monthly growth rate of a certain variable and seeing how it would change over a year’s time if it continued to grow at that rate. This is commonly done for data that isn’t seasonal.

Year-over-year is a helpful calculation for businesses and investors to look at, but it shouldn't be the only calculation they use. Sometimes, breaking down revenue or investment returns by month can be useful. A particularly strong month might be smoothed out when you're only looking at yearly numbers. But a really bad month for the business could also be overlooked if only year-over-year measurements are used.

Another issue with year-over-year calculations is that they can't fully explain the details behind economic or business growth. Year-over-year measures reveal trends, but they don't provide enough information to explain why these trends are occurring.

Other business metrics or economic data will be necessary to explain why a company is growing or slowing down.

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