How is Year Over Year Calculated?
To calculate the year-over-year growth rate, the first thing to do is define the time periods you'd like to analyze. For instance, you may choose to compare the first quarter performance of a company against last year’s first quarter.
The YoY equation can be written as follows:
YoY = [ Current Period Value / Prior Period Value ] – 1
For example, suppose first-quarter sales were $1.25 million. However, first-quarter sales from last year were $1 million. In this case, the year-over-year growth would be:
[1,250,000 - 1,000,000] - 1 = 0.25 or 25%
When its meaningful to compare the change in values of more than two periods, this can be done by finding the CAGR or "compound annual growth rate". Continuing with the same example, you may wish to know how much the company has grown by comparing the first-quarter performance results over the past five years.
Calculating the CAGR is not as simple as averaging the year-over-year return for each period. The equation is much more complex and takes the initial and ending value for the entire time period assuming that the growth of each period was reinvested. This creates the basis for annual compounding.
What Applications Is Year Over Year Analysis Used?
Year-over-year analysis can be very helpful for analyzing a variety of different fields where performance will be measured.
Company management will use YoY metrics to determine the health of the business and look for any areas where improvement is necessary. The following are a few of the most commonly monitored values:
● COGS (cost of goods sold)
● EBIT (earnings before interest and taxes)
● EPS (earnings per share)
Again, this approach can be utilized with end-of-the-year figures, quarters, or even months. This is particularly helpful in cases where the business is affected by seasonality trends (such as summer travel or holiday shopping).
YoY metrics can also be practical for comparing businesses within the same industry. For example, an analyst may compare a major technology company like Meta (formerly Facebook) against another well-known player such as Alphabet (formerly Google) to determine how they are performing relative to one another.
Similar to business, economists will use YoY analysis to measure the state of the nation’s economy. This often includes key performance indicators such as:
● GDP (gross domestic product)
● CPI (consumer price index)
● Unemployment Rate
● Interest Rates
For example, inflation is calculated using the 12-month change in CPI. Every month, the U.S. Bureau of Labor and Statistics will survey the prices paid by consumers for a representative basket of consumer goods and services and compute a value called the CPI. When this value is compared to the value from the same month a year ago, the percentage of change is what gets reported in the media as the current rate of inflation.
Investors can compare various opportunities using YoY metrics. For example, an ETF (exchange-traded fund) that has produced a 12% return from last year might look more favorable than one that only had an 8% return.
Note that this methodology can be used for more than just potential equity appreciation. For instance, an investor who favors companies with consistent dividend growth might use YoY analysis to screen out any companies that have cut their dividend payments since last year.
The Bottom Line
Experts can make performance comparisons about businesses or trends in the overall economy by using year-over-year analysis. By finding how much growth or loss has been experienced, we can draw conclusions and identify if actions need to be taken. When a period greater than one year is in question, then an alternate calculation for the annual compounded growth rate should be used instead.