What is year-over-year (YOY)?
There are many financial terms that you may not be familiar with. One of the most common finance terms is “YOY.” YOY stands for year over year, and it often refers to stock market terminology.
Stocks that show a more significant return than average are referred to as “year over year winners,” while stocks that are down for the year are referred to as “year over year losers.”
The term derives its meaning from comparing a company’s financial performance over one year against its performance over the previous year.
Any measurable event that occurs on an annual basis/same period can be compared year over year. Annual, quarterly, and monthly performance are frequently compared year over year and allow you to calculate yoy growth.
It’s important to note that companies can have negative year-over-year figures because they’ve lost money in recent quarters but still managed gains in other quarters.
How to calculate yoy growth?
Year over year calculations are simple and are generally represented in percentage terms.
This is accomplished by dividing the current year’s value by the prior year’s value and subtracting one:
(current year)/(previous year) – 1.
Year over year comparison benefits
Year over year evaluations enables the comparison of multiple sets of data. By comparing years of first-quarter revenue data, a financial analyst or investor can quickly determine whether a company’s revenue is increasing or decreasing.
Real-world example – in the first quarter of 2021, the Coca-Cola company reported a 5% increase in net revenue over the prior year’s first quarter.
Comparing the same months in different years makes it possible to make accurate comparisons despite consumer behavior’s seasonal nature.
Additionally, this yoy comparison is beneficial for investment portfolios. Investors like to look at year-over-year performance to see how performance varies over time.
Why is year over year basis used for analysis?
Year over year comparisons are popular when evaluating a company’s performance because they help mitigate seasonal changes, which affect most businesses.
Profits, sales, and other financial benchmarks fluctuate throughout the year, as most lines of business have a high point and a low point season.
For instance, retailers experience a period of increased demand all through the holiday shopping season, which occurs in the fourth quarter of the year. It’s helpful to compare revenue and profits year over year to measure a company’s performance accurately.
It is critical to compare a year’s one-quarter performance to previous years’ one-quarter performance.
Suppose an investor compares a retailer’s fourth-quarter results to the prior third-quarter results. In that case, it may appear that the company is experiencing unprecedented year-over-year growth when the difference in results is due to seasonality.
Likewise, when the fourth quarter is compared to the next quarter, a rapid fall may appear, but this could also be due to seasonal variation.
Additionally, the term “year over year” is distinct from “sequential,” which compares individual quarters or months to the previous ones and enables investors to see linear progress.
For example, the number of cell phones sold by a technology company in the fourth quarter versus the third quarter, or the number of seats filled by an airline in January versus December.
The difference between YOY and YTD
YOY measures change over 12 months. Year-to-date, or YTD, data is compared to the start of the year (usually January 1st).
Year Over Year winners
Year over year (YOY) winners are stocks that had better performance in the past 12 months than their performance in preceding years.
For example, if stock A was at $10 per share on January 1st, 2020, and is currently trading at $14 per share on January 1st, 2021, you would say that stock A has experienced a 33% increase over the past 12 months. Given that the stock market has an average YOY of 6%, you can see that stock A did better than others in its sector for the past year.
Stock A had a YOY of 33%, while others in its sector experienced an average YOY of 6%.
Year Over Year losers
Year over year (YOY) losers are stocks that had a worse performance in the past 12 months than their performance in previous years.
For example, if stock B was at $10 per share on January 1st, 2020, and is currently trading at $8 per share on January 1st, 2021, you would say that stock B has experienced a 25% decrease over the past 12 months. Given that the stock market has an average YOY of 6%, you can see that stock B did worse than others in its sector for the past year.
Stock A had a YOY of 33%, while others in its sector experienced an average YOY of 6%.
Why it’s important to know if a stock is a YOY winner or loser
YOY winners are positive future indicators for a stock as it means that the stock has been doing better than others in its sector.
On the other hand, YOY losers may not necessarily be ominous signs. The company could have experienced problems in one sector of their business but still grew or showed profits in other sectors.
Although this is true, it does mean that the stock isn’t performing up to its potential and therefore should be researched for future investments.
So if you’re an investor looking to make a profitable purchase, make sure your stock is a YOY winner by checking the stock’s most recent quarter on finance websites.
Remember, though, just because a company has a positive YOY figure doesn’t make it a good investment. Make sure you do your own research before making any investments.
Example:
Company A had a YOY of 33%, while Company B had a YOY of –25%.
Company A is performing better than company B, a positive indicator that allows you to predict future YoY growth rate.
Be sure to do your own research before investing.
How to invest in stocks based on the trend of the market over 12 months
A market trend is a directional indicator of how the stock market has been performing over the previous year.
For example, suppose you look at finance websites and see that the S&P 500 (stock market index) had experienced an average YOY 6% growth over the previous full year. In that case, you can conclude that the overall market trend is positive.
Knowing this, you can make a more educated decision on the stock’s future growth by checking if they are YOY winners or losers over the past 12 months. If the stock has been performing better than average, then it’ll likely continue to do so in the years ahead as well.
Know your investments!
