Year-Over-Year (YOY): What It Means, How It's Used in Finance

What Is Year-Over-Year (YOY)?

Year-over-year (YOY)—sometimes referred to as year-on-year—is a frequently used financial comparison for looking at two or more measurable events on an annualized basis. Observing YOY performance allows for gauging if a company’s financial performance is improving, static, or worsening. For example, you may read in financial reports that a particular business reported its revenues increased for the third quarter, on a YOY basis, for the last three years.

Understanding Year-Over-Year Growth

Year-over-year growth compares a company's recent financial performance with its numbers for the same month one year earlier. This is considered more informative than a month-to-month comparison, which often reflects seasonal trends..

Common YOY comparisons include annual and quarterly as well as monthly performance.

Benefits of YOY

YOY measurements facilitate the cross comparison of sets of data. For a company’s first-quarter revenue using YOY data, a financial analyst or an investor can compare years of first-quarter revenue data and quickly ascertain whether a company’s revenue is increasing or decreasing.

For example, in the first quarter of 2021, the Coca-Cola corporation reported a 5% increase in net revenues over the first quarter of the previous year. By comparing the same months in different years, it is possible to draw accurate comparisons despite the seasonal nature of consumer behavior. This YOY comparison is also valuable for investment portfolios. Investors like to examine YOY performance to see how performance changes across time.

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.

Real-World Example

In a 2019 NASDAQ report, Kellogg Company released mixed results for the fourth quarter of 2018, revealing that its YOY earnings continued to decline, even when sales increased following corporate acquisitions. Kellogg predicted that adjusted earnings would drop by a further 5% to 7% in 2019 as it continued to invest in alternate channels and pack formats.

The company also revealed plans to reorganize its North America and Asia-Pacific segments, removing several divisions from the former and reorganizing the latter into Kellogg Asia, Middle East, and Africa. Despite decreasing YOY earnings, the company’s solid presence and responsiveness to consumer consumption trends meant that Kellogg’s overall outlook remained favorable.