By Bob Ciura
In finance, business, and investing, you are likely to come across the phrase “year-over-year” (abbreviated as YoY) quite often.
First, a quick definition of what year-over-year means. Year-over-year compares results from one time period to the same time period in the previous year.
As an example, if a company reported earnings-per-share of $11.00 in fiscal 2018 and earnings-per-share of $10.00 in fiscal 2017, it would have achieved year-over-year growth of 10% (The math: $11/$10 -1 ).
This article explores the meaning of year-over-year, gives a real-world example of its use, and discusses why it matters.
Table Of Contents
- What Is Year-Over-Year?
- Why Is Year-Over-Year Important?
- Real World Example Of Year-Over-Year Usage
- Final Thoughts
What Is Year-Over-Year?
When a company reports its quarterly financial results, it will typically at least announce its revenue and earnings-per-share for the preceding three-month period. These figures, along with a host of other quarterly numbers, are provided in the income statement, balance sheet, and statement of cash flow.
Aside from the quarterly financial statements, companies typically also discuss their results in a press release and a conference call with analysts who cover the stock.
In addition to providing the hard numbers, companies will also show the percentage increase or decrease across these metrics. Investors certainly want to see growth in the financial measures that matter the most.
But it is important for investors to dig a little deeper to understand the exact comparison being made. In a quarterly earnings announcement, a company compare its most recent quarter against the results from the previous quarter. This is known as a quarter-over-quarter comparison, sometimes referred to as a sequential comparison.
This can be valuable information for investors, particularly if the company in question does not operate in a cyclical industry. If a company does a similar level of business across all four quarters of the year without cyclicality, a sequential comparison can be helpful to gauge a company’s recent performance.
More frequently, companies will show their quarterly numbers alongside the results achieved in the same quarter of the previous year. This is known as a year-over-year comparison.
For example, if a company’s revenue in the first quarter of 2019 was $1.1 billion, compared with $1.0 billion in the first quarter of 2018, it will have a year-over-year revenue growth rate of 10%.
The same year-over-year comparison can be done with annual results. When a company announces its fourth-quarter results, it will also typically show its results for the full year, compared with the previous full year.
It is also wise for investors to research a company’s full-year results, as it allows for a deeper understanding of longer-term trends. As the saying goes, one quarter does not a trend make.
Analyzing sequential results means investors are focusing on two back-to-back quarters, which exposes investors to focusing too much on short-term results.
Instead, it is far more valuable to analyze how a company performed in the full year, compared with the previous year. Annual comparisons is another advantage of utilizing year-over-year results, that quarter-over-quarter analysis does not provide.
Why Is Year-Over-Year Important?
In many ways, a year-over-year comparison is more valuable for investors than a quarter-over-quarter, or “sequential” comparison. First, there are many companies that operate cyclical businesses, in which a large portion of annual revenue is generated in a specific quarter.
Think of retailers such as department stores, which generate the vast majority of their annual profits in the fourth quarter, during the busy holiday shopping season.
In that case, comparing the company’s fourth-quarter results to its third-quarter results would give investors the wrong impression, as the fourth quarter will almost always show significant growth from the third quarter.
Real World Example Of Year-Over-Year Usage
Not surprisingly, the fourth quarter is by far the most important for Macy’s. It’s when the big Christmas sales boost occurs.
In the 2018 fourth quarter, Macy’s generated adjusted earnings-per-share of $2.73 excluding asset sales, which represented 65% of the company’s full-year adjusted EPS.
Source: Investor Presentation
The third-quarter is relatively inconsequential for Macy’s. Adjusted EPS for the 2018 third quarter totaled just $0.27 per share.
If investors compared Macy’s fourth-quarter results with the third quarter, they would come to the conclusion that Macy’s adjusted EPS soared more than 10-fold, a highly impressive performance.
But looking at the company’s results on a year-over-year basis would reveal that Macy’s fourth-quarter adjusted EPS actually declined by 4.2% from the 2017 fourth-quarter.
This gives investors a vastly different impression than they would get if they looked at Macy’s financial results solely from a quarter-over-quarter perspective.
Furthermore, the investor looking at Macy’s results through the lens of quarter-over-quarter might also think that Macy’s performed fairly poorly in the 2018 third quarter. With adjusted EPS of just $0.27, this certainly looks weak.
But again, the proper context is important. Macy’s generated adjusted EPS of $0.21 in the 2017 third quarter, which means the company actually grew adjusted EPS by nearly 30% in the 2018 third quarter–a much more impressive result.
It is more accurate to judge a company’s quarterly results with those of the same quarter in the previous year. This is more of an “apples-to-apples” comparison which gives investors a better chance to reach the correct conclusion regarding the company’s performance.
As a result, judging a company’s fundamentals on a year-over-year basis provides the proper context to truly see how the company is doing.
Final Thoughts
There are many important financial analysis and valuation methods. Investors interested in buying individual stocks should consider not just a company’s financial results in a given quarter or year, but also valuation tools such as the price-to-sales or price-to-earnings ratios.
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In the financial analysis process, investors should be aware of the differences between quarter-over-quarter and year-over-year comparisons. In almost every instance, it is more valuable to use year-over-year.
