What is Year over Year Growth? Why is it Important?

Do you know how your company is doing this year in comparison to last? No? To find out, compute year-over-year growth. Knowing the financial health of your company puts you in a better position to make decisions. Continue reading to find out what year-over-year growth is, why it matters, and how to calculate it.

 

What is Year over Year?

 

Year-over-year growth is a popular metric in economics and finance. Comparing how a variable performs from one year to the next is an important way for a company to determine whether certain areas of its business are expanding or contracting. 

 

A year-over-year comparison has the advantage of excluding monthly fluctuations. Many businesses experience an increase in sales during the holiday season in November and December. 

 

If a company reported a 35% increase in revenue in December, the data would be less informative than a report showing a 20% increase in revenue from December to December. The latter period is a year-over-year measure that indicates revenue is increasing every year rather than just for the holiday season.

 

Any economic or financial variable's year-over-year growth is calculated using a simple formula. To calculate GDP year over year, use the following formula:

 

(GDP of 2022 - GDP of 2021) / GDP of 2021 * 100%

 

This would give you the GDP percent change from 2022 to 2021, or the GDP year-over-year growth.

 

How does Year-over-Year Work?

 

Many government agencies report economic data using year-over-year calculations to explain the previous year's economic performance. Year-over-year calculations are simple to understand and allow for easy comparison over time.

 

The consumer price index, gross domestic product, unemployment rates, and interest rates are some of the primary economic data reported in this manner. Businesses will also calculate key financial performance metrics using year-over-year data.

 

Economic data is frequently displayed using year-over-year calculations, but government agencies may also choose to annualize a monthly growth rate. 

 

The monthly growth rate of a specific variable is used to see how it would change over a year if it continued to grow at that rate when a percent change is annualized. This is frequently done with data that isn’t seasonal.

 

Year-over-year growth is a useful calculation for businesses and investors to consider, but it should not be the only calculation they use. Breaking down revenue or investment returns by month can be beneficial at times. 

 

When only yearly figures are considered, a particularly strong month may be smoothed out. However, if only year-over-year comparisons are used, a particularly bad month for the company may be overlooked.

 

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

 

How to calculate YOY?

 

Follow these steps to calculate YOY :

 

1. Choose a metric from which to derive YOY values

 

When applied to a variety of metrics, YOY can be very informative. Businesses commonly compare revenue year over year, but they can use any value that appears on a financial report. 

 

Earnings Before Interest and Taxes (EBIT), economic value-added, net cash flow, liquidity ratio, and other metrics are included. Choose one or more YOY value sets that will lead you to the most insightful conclusion about your company or investment.

 

2. Subtract two relevant data points

 

Simply subtract the two numbers after you've chosen the data sets you want to use. The formula's output is the difference of the values, which will be converted into a ratio in the next step.

 

3. Calculate the difference

 

Divide the difference by the previous year's value from your original equation. This should yield a decimal answer.

 

4. Determine a Percentage

 

To get your percentage, move your decimal point two places to the right. Depending on the level of precision required, you can round the percentage to a near whole number or work in decimals.

 

Also Read | What is a Financial Statement? | Analytics Steps

 

 

Why is Year-over-Year Growth Important?

 

There are several reasons to consider YOY growth. Year-over-year calculations can:

 

1. Show you what works and what doesn't

 

Your year-over-year calculations can help you assess the performance of your company. You can see if your company is growing from year to year rather than just month to month. You can easily see long-term trends and whether your business is improving over time.

 

You can see what works and what doesn't by measuring multiple business performance areas. If something isn't working, you may need to cut costs or make other changes to improve. For example, your cost per acquisition may be lower year over year for Product A but not for Product B.

 

2. Assist you in obtaining Investments

 

Before providing you with business capital, most investors will want to see your year-over-year numbers. Your year-over-year growth tells them whether or not your company is a good investment for them.

 

Whether the investor is a family member, a friend, a private investor in your small business, or someone else, make sure your year-over-year comparison is available.

 

3. Put seasonality in the proper context

 

YOY calculations are especially useful for businesses that experience seasonal peaks. A greenhouse's sales, for example, may peak in the spring and summer, whereas a retail business may peak in November and December.

 

Any monthly volatility is smoothed out by the YOY growth rate. You can compare your current business numbers to the same time last year to avoid seeing large increases and decreases between seasonal months.

 

You might discover:

 

• You're doing better than last month, but you're still down from last year.
• You're doing worse than last month but better than last year.

 

4. Assist you in identifying errors

 

A year-over-year analysis, like using a comparative income statement, may help you find errors and discrepancies in your books.

 

If there are significant increases or decreases from the previous year, you may have recorded something incorrectly. Examining several periods year after year can help you narrow down when you made the mistake.

 

Reason behind Year over Year

 

When analyzing a company's performance, YOY comparisons are popular because they help mitigate seasonality, a factor that can affect most businesses. Sales, profits, and other financial metrics fluctuate throughout the year because most industries have a high and low demand season.

 

Retailers, for example, experience peak demand during the holiday shopping season, which occurs in the fourth quarter of the year. To properly quantify a company's performance, compare revenue and profits year over year.

 

It is critical to compare the fourth-quarter performance of one year to the fourth-quarter performance of other years. If an investor compares a retailer's fourth-quarter results to the previous third-quarter results, it may appear that the company is experiencing unprecedented growth when, in fact, the difference is due to seasonality. 

 

Similarly, a dramatic decline in the fourth quarter compared to the following first quarter may appear, but this could also be due to seasonality.

 

YOY is also distinct from the term sequential, which compares one quarter or month to the previous one and allows investors to see linear growth. For example, the number of cell phones sold by a tech company in the fourth quarter versus the third quarter, or the number of seats filled by an airline in January versus December.

 

Also Read | What is Financial Analysis? Types, Examples, and Techniques

 

Advantages and Disadvantages of the Year-over-Year Growth

 

Benefits of Year-Over-Year Growth

 

For business owners and retailers, analyzing year-over-year growth has several advantages, including:

 

1. A business strategy direction. Understanding year-over-year growth can be critical for companies that have been in operation for more than 13 months. Its data can be used to help direct business strategy. 

 

If sales figures are high but the YOY growth percentage is low, this can point to issues ranging from manufacturing and production efficiency to overhead and expansion costs.

 

2. Lenders can get quick financial information. YOY growth can better predict the long-term outcomes of your business efforts than monthly or quarterly metrics. 

 

This data is extremely useful for lenders, banks, and decision-makers looking for straightforward statistics on your company's growth. This information will be reviewed by lenders, in particular, as part of the loan application process.

 

3. Top-tier insight for seasonal businesses. Year-over-year growth can provide a more accurate picture of seasonality—the fluctuations that occur in seasonal businesses throughout the calendar year—than month-over-month metrics. 

 

Sales growth is typically a volatile area for such businesses, but YOY can help highlight issues that may affect long-term growth. For example, a strong season one year followed by a weaker season the next year can indicate problems that, if not addressed properly, can develop into negative trends.

 

 

Drawbacks of Year-Over-Year Growth

 

There are only a few disadvantages to year-over-year growth. 

 

1. One disadvantage of YOY growth is that it cannot account for volatility, making it ineffective for highlighting short-term changes. Annual numbers will provide a more accurate picture.

 

2. It does not benefit startups or businesses with less than 13 months of operation because there is no previous year to compare data with. In this case, monthly or quarterly metrics are preferable.

 

 Also Read | Top 10 Growth Metrics To Track

 

Some Real-World YOY Growth Examples

 

YOY growth is useful in retail, but several other industries can benefit from including these measures in KPIs and analytics. These are just a few examples of how beneficial YOY growth can be:

 

While YOY growth reigns supreme in retail, many other industries can benefit from including these metrics in KPIs and analytics. Examine the following examples to see how beneficial year-over-year growth can be:

 

1. Healthcare: It's critical to look at year-over-year figures with different policies when measuring things like patients served or cost per patient. Observing how performance changes after introducing a new practice can reveal whether or not it was effective.

 

2. Manufacturing: The efficiency of a factory's production lines determines its fate. Measuring how much manufacturing rates increase or decrease over time is critical for understanding processes, machine performance, and many other things. 

 

Manufacturing analytics can help companies better prepare for seasonal changes and understand their long-term opportunities and challenges by combining efficiency information with sales data.

 

3. Logistics: In an industry measured by the number of items delivered and efficiency, year-over-year growth can indicate whether a company is remaining efficient and effective in the market, or if performance is slipping. 

 

When comparing deliveries over time, it is possible to identify areas for improvement and activities where streamlining functions may be beneficial.

 

Alternatives to YOY Growth

 

While year-over-year growth is an important calculation to consider for your business, it is not the only time-series measurement that can help you get a better picture of performance. You may also want to compute the following:

 

1. Month to date (MTD): Measures a KPI from the start of the current month until the current date, excluding today's date.

 

2. Quarter to date (QTD): Measures a KPI from the start of the quarter until the current date, excluding today's date.

 

3. Month over the month (MoM): The difference between this month's total (sales, users, etc.) and last month's total.

 

The year-over-year (YOY) calculation compares data from one time period to the previous year. When discussing economic or financial data, year-over-year calculations are frequently used. Viewing year-over-year data allows you to see how a specific variable changes over the course of a year rather than just weekly or monthly.

 

When assessing the performance of an economy or an investment, a longer time horizon puts data into better context.