In investing, it’s important to be able to compare the same time period this year vs last year. This is what we call “year-over-year” or YoY. It helps us mitigate seasonality and allows investors to compare data and determine growth rates or declines. In this comprehensive guide, we’ll break down what YoY is, how it works, and why it’s so important in stock analysis!
What is YoY in Stocks?
YoY is an acronym for “year-over-year.” It’s a way of looking at data that compares the same time period from one year to the next. For example, if you’re looking at stock prices, you can compare the price from January of this year to January of last year. This is a helpful way to smooth out any seasonality in the data and get a better sense of underlying trends.
YoY can be applied to all sorts of data, not just stock prices. For example, you can look at year-over-year growth rates for company revenue, earnings, number of users, etc. It’s a versatile tool that can be used in many different ways.
One important thing to keep in mind with year-over-year is that it only tells you about growth rates, not absolute levels. So if a company’s revenue was $100 million last year and $120 million this year, that’s a 20% YoY growth rate. But if the company’s revenue was $20 billion last year and $20.02 billion this year, that’s only a 0.01% growth rate – even though it’s technically the same $20 million increase.
This is why year-over-year is often used in conjunction with other metrics, such as total revenue or the absolute number of users. It can give you a more well-rounded picture of what’s going on with a company.
How to Calculate YoY Growth or Decline in Stocks?
There are a few different ways to calculate year-over-year growth rates. The most common method is simply to take the current year’s number and divide it by the previous year’s number. So in our example above, the 20% year-over-year growth rate would be calculated as follows:
(120 million / 100 million) – 1
This gives you the percentage change from one year to the next.
Another way to calculate YoY is to take the current year’s number and subtract the previous year’s number. So in our example above, the 20% YoY growth rate would be calculated as follows:
(120 million – 100 million) / 100 million
This gives you the absolute change from one year to the next as a percentage of the previous year’s number.
Uses and Examples of Year-over-Year in Financial Calculations
YoY can be used in a variety of ways when analyzing stocks or reviewing the financial condition of the company. One common use is to look at YoY growth rates for a company’s revenue or earnings. This can give you an idea of how well the company is doing and whether its business is growing or shrinking.
In the USA, public companies are required to report their earnings once every quarter to the shareholders. A YoY comparison of the same quarter’s revenues or earnings from one year to the next can show if there is an upward or downward trend. If a company consistently reports lower YoY earnings growth rates quarter after quarter, it might be a sign that the business is in trouble and you should reconsider investing.
Another way to use year-over-year when analyzing stocks is to compare year-over-year growth rates across different companies in the same industry. This can give you a sense of which companies are growing faster or slower than their peers. For example, let’s say you’re looking at two tech companies, Company A and Company B. Both companies are reporting strong revenue growth, but Company A is growing at a 20% year-over-year clip while Company B is only growing at 15% YoY. This might make you more bullish on Company A and more bearish on Company B.
YoY can also be useful when comparing companies across different industries. For example, let’s say you’re looking at a company in the retail industry and a company in the tech industry. Both companies are reporting 20% year-over-year revenue growth. However, the retail company is growing from a base of $50 million while the tech company is growing from a base of $500 million. In this case, the tech company’s 20% year-over-year growth rate is much more impressive than the retail company’s 20% year-over-year growth rate.
You can also make a year-over-year comparison for other financial data. For example, if the finished goods inventory grows at a rate faster than the sales growth in the same period YoY, this implies that the company is having difficulty selling its products and/or services and finished goods inventory is piling up in the warehouses. This might be a red flag that you should avoid investing in the company.
Another example is something of great interest to an investor who requires income from his or her stocks. YoY growth in dividends paid out by the company on its stock is a very desirable thing. If the dividend growth rate is high, this means that the company is doing well and is likely to continue paying out high dividends in the future. If the investor relies on the dividend income for living expenses in retirement, this dividend growth helps the investor keep up with the inflation, or even improve his finances over time. If the investor is still in an accumulation phase, growing dividends can be reinvested in more stock to accelerate the compounding returns from the investment.
As you can see, YoY growth rates can be useful in a variety of ways when analyzing stocks.
Pros and Cons of Using Year Over Year in Stocks
There are a few pros and cons to using year-over-year growth rates when analyzing stocks.
One of the biggest pros is that it can help smooth out any seasonality in the data. For example, if a company’s business is seasonal (i.e. it does most of its business in the winter), comparing its YoY growth rate from one winter to the next can give you a better idea of how well it’s doing than comparing its growth rate from one quarter to the next.
Another pro is that it can help you compare companies across different industries. As we saw in the example above, comparing the YoY growth rates of a retail company and a tech company can give you a better sense of which company is growing faster.
A con of using year-over-year growth rates is that it can be difficult to compare companies across different countries. This is because each country has its own economic cycle and so comparing companies on a YoY basis can be apples-to-oranges. For example, if Company A is based in the United States and Company B is based in China, it might be difficult to compare their year-over-year growth rates because the two countries have different economic cycles.
A final con is that YoY growth rates can be manipulated by management. For example, if a company is having difficulty meeting its quarterly targets, management may choose to cut costs in order to boost the year-over-year growth rate. This might not be sustainable in the long run and so it’s important to be aware of this potential issue when analyzing stocks.
Comparison to Other Methods of Stock Analysis
YoY growth rates are just one of many methods that investors can use to analyze stocks. Some other popular methods in finance include price-to-earnings (P/E ratios), price-to-sales (P/S ratios), and return on equity (ROE).
Each of these methods has its pros and cons and so it’s important to use a combination of methods when analyzing stocks. For example, if you only use P/E ratios to analyze stocks, you might miss out on some good companies that have low P/S ratios but high P/E ratios.
Similarly, if you only use ROE to analyze stocks, you might miss out on some good companies that have low P/E ratios but low ROEs.
Finally, a very high year-over-year earnings growth may be tempting for investors. A quick look at the P/E ratio might show that the stock price already reflects all the optimism in the market and more, so the stock may not be a good investment at this time. A good investment analysis considers a variety of financial information before acquiring a single share
Ultimately, there is no one best method to analyze stocks or investments. it’s up to the individual investor or the analyst to decide which methods of stock analysis are most important to them.
Final Thoughts on YoY in Stocks
In conclusion, YoY growth rates can be a useful tool for investors when analyzing stocks. They can help smooth out any seasonality in the data and can also be helpful when comparing companies across different industries. However, it’s important to be aware of the potential drawbacks of using year-over-year growth rates, such as the difficulty of comparing companies across different countries and the potential for manipulation by management. Ultimately, it’s up to the individual investor to decide which methods of stock analysis are most important to them. You should also consider other data on the financial statement before you invest for best results.
Year over year comparisons are prevalent in the broader economy as well for the same reasons of mitigating the effects of seasonality and comparing growth. For example, economic data such as GDP or unemployment is compared YoY. Mutual funds report their performance data as YoY comparisons and much investing performance data is presented as a year-over-year comparison. You should also note that year comparisons are not the only way to do growth rate calculations – you could compare data quarter over quarter or month over month if the context requires it.