Year-Over-Year (YoY) Analysis: Advantages and Disadvantages
Definition of Year Over Year Analysis (YoY) Analysis
Year-Over-Year (YoY) is a type of financial analysis used to compare data between time series. It is a data comparison of one time period (ex: a month) against the comparable previous period (ex: the same month in the previous year). Year-Over-Year (YoY) analysis is used in economic and investment analysis and helps to comprehend the growth pattern from year to year.
As an example, an investor would be keen to compare the performance of investment returns on a year-over-year basis to decide whether to invest or not, understand the growth pattern, and also choose the best with multiple investment options.
Advantages (Pros / Positives / Benefits) of Year Over Year Analysis (YoY)
1. Year Over Year (YoY) method can be used to analyze the annual, quarterly as well as monthly growth trend based on financial need.
As an example, Quarter 4 in any year (Jan, Feb, March) is a comparatively performing quarter for most companies. Company management can do a YOY analysis to compare the current year’s Quarter 4 with the last year’s Quarter 4 to understand whether the company is growing (considering the seasonal factor), rather than comparing Quarter 4 with Quarters 3, 2, and 1 in the same year.
2. Can compare financial statistics with compensate seasonal changes, rather than doing total returns comparison. YoY analysis helps to calculate the growth trends by mitigating seasonality factors.
As an example: Most companies expected to improve sales in the December month of any year due to the Christmas season. Comparing the sales data of the December month between years will be more beneficial for the investors rather comparing the yearly total. Investors can easily figure out the revenue trend and growth while considering the seasonal factor.
3. The YoY analysis method is a simple calculation. This does not require complex calculation methods. Simply the YoY can be calculated using one of the below approaches,
Approach 1: current year value divided by the previous year’s value, subtract the result from 1
Approach 2: current value minus the previous value and then divide the result by the previous value
4. YoY calculation results in a percentage value which easily comparable. As an example, if an investor does a YoY calculation of multiple investments, all the calculations return the percentages values, which the investor can easily compare and make decisions.
5. YoY is a popular and effective way to evaluate the financial statistics of a company and also evaluate the investment returns. Trend and growth are directly visible in the analysis.
Disadvantages (Cons / Negatives / Drawbacks) of Year Over Year Analysis (YoY)
1. The YoY method does not provide information on how to improve performance. It only provides the percentage value of the growth compared with the previous timeframe given.
2. This method is not practical for startup companies since no previous stats are available. This method requires past data to do the calculations and determine the growth percentage value.
3. The YoY method can compare only two measured events at a single calculation.