DEFINITION: The phrase “year-over-year,” sometimes abbreviated as “YOY,” refers to a commonly used quantitative method of analyzing two or more recurring, financially relevant variables on an annualized scale.
YOY analysis has several advantages for evaluating a company’s economic performance, including assessing whether its financial situation is growing, standing still, or shrinking.
ETYMOLOGY: The phrase “year-over-year” cannot be traced to an exact origin. However, it undoubtedly evolved along with the growth in publicly traded stocks, transparency in financial statements, improved financial analyses, and the accounting profession, more generally, over the course of the late nineteenth or early twentieth century.
The phrase likely originated in Britain, as the idiomatic American equivalent would be “year-to-year.”
The English word “year” is attested from around the eleventh century. It derives, via Middle English yere, from Old English gēar, which is akin to Old High German jār, with the same meaning.
The English preposition “over” is also attested from the eleventh century. It derives, via Middle English, from Old English ofer, akin to Old High German ubar.
USAGE: A year-over-year analysis of a company’s growth compares its recent financial performance with comparable data for the same time one year earlier.
These annualized figures will likely be more indicative of the true status of a company’s financial well-being than, say, a shorter, a month-to-month comparison would be.
To illustrate how YOY works, take the case of Company A, a widget-maker. Company A’s financial reports might indicate that during the month of December of 2022, its net widget sales stood at $11,000 and that during the month of December of 2021, they amounted to $10,000. This shows that widget sales are up by ten percent for period between January 1, 2022, and January 1, 2023.
If one did a similar analysis on the two or three years prior to 2021 and found similar results of a YOY increase of around ten percent, one would be entitled to conclude that Company A is in a strong financial position.
Note that there is some flexibility in the nature of the variable chosen for year-over-year comparison: in addition to sales-by-month, sales-by-quarter are also frequently selected for YOY analysis.
One of the chief advantages of year-over-year comparisons is the way they help to provide a picture of a company’s financial position that is not skewed by such factors as seasonality.
For many if not most businesses, sales and profit levels, as well as various financial metrics, may fluctuate throughout the year in a predictable way, due to seasonal effects on demand.
For example, it would make little sense for retailers which are strongly affected by year-end holiday shopping to compare their sales month-to-month. All that would do would be to track the seasonal change in demand for their product, which is something that is already known.
Similarly, if an investor compares a company’s performance sequentially (that is, during consecutive quarters), he or she might be misled by passing trends due to transient changes in the company’s management, in market conditions, etc.
What is needed is some means of offsetting seasonality and other transient effects. And that is just what YOY analysis provides.
Comparing a company’s last-month or fourth-quarter performance across at least two different years is desirable precisely because it takes into account the total change in sales over the entire intervening year, thus wiping out any effects from seasonality.