How to use the year-over-year (YoY) calculation to track the growth of an investment

Calculating year-over-year change is one way for investors to track stock and company performance over time.

Derek Silva

Derek Silva

Published June 21, 2019

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KEY TAKEAWAYS

  • Analyzing performance year over year eliminates effects of seasonality

  • Year-over-year changes allow you to compare across industries

  • Analyzing government data, like consumer spending, year over year can provide an indication of how the economy is performing

For investors trying to pick stocks, it’s useful to study a company’s finances and the historical performance of their stock. You can analyze both by looking at key year-over-year (YoY) changes.

Considering changes year over year allows you to compare data from multiple periods and to find trends in that data. Investors and stock analysts usually compare across quarters, but any time period is possible. Some statistics are better to look at monthly or annually.

Perhaps most importantly, comparing year over year lets you remove the effect of seasonality so that you can make apples-to-apples comparisons. This helps investors look at company performance indicators like net income, sales, or spending. You can also analyze the performance of stocks and mutual funds. Outside of investing, government statistics are sometimes analyzed year over year because it offers a simple way to adjust data seasonally. For example, annual salary growth is sometimes presented year over year.

In this article:

Why to use YoY calculations

The biggest benefit to comparing year over year is that you can eliminate the effects of seasonality.

For example, a company in the retail industry will probably have above-average sales in the fourth quarter because of holiday shopping. If you compare sales between the third and fourth quarters, it may look like the company is growing. However, this increase is just seasonal. Instead, comparing the retail sales figures to last year’s fourth quarter would show you how this fourth quarter actually stacks up. It’s quite possible fourth quarter earnings are higher than the third quarter but actually lower than last year.

Year-over-year changes are expressed as a percentage, which also means you can use them to compare companies of different sizes and to compare across industries. What qualifies as a high growth rate in one sector of the economy may be the same from another, but you still have a standardized way to compare.

When you can use YoY calculations

One situation where you can use year-over-year change is to analyze how the general market is performing. For example, monthly or quarterly data on employment numbers and consumer spending can serve as indicators of a recession. However, you cannot look at just the raw data for these metrics because seasonal fluctuations may lead you to misrepresent the data.

For investors, looking at year-over-year change for key data on a company’s financial statements can help you decide whether or not to invest in their stock. One example is cash flow, the total money going in and out of a company.

A positive cash flow is a good sign that the company won’t need to borrow excessively or even go under should hard times hit. It’s also an indicator that the company is in a good position to expand. It isn’t the only number you should consider but cash flow is a key metric, especially for companies that aren’t necessarily profitable. (This is sometimes the case when companies IPO.)

Securities and funds in your personal portfolio can also benefit from year-over-year analysis. It can help you look past present volatility to see whether or not an investment will keep you on track to meet your goals. This is particularly useful when you have a long time horizon and won’t need to withdraw money for years, such as when saving for retirement.

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Risks of using the YoY calculation

Like other forms of stock or business analysis, looking at change year over year is only one metric you should consider. Just because a stock’s value has grown quickly doesn’t mean it’s a sound investment.

The biggest limitation to using year-over-year is that you need to have at least 12 months’ worth of data. If you don’t have data from the previous year, you cannot compare year over year. Similarly, comparing year over year is challenging with negative numbers. It’s possible to calculate negative growth but having a negative value, like if one year has income of $1,000 but the next has income of - $500, can distort calculations. More complex math is generally necessary if you have negative values.

The period you choose to compare also makes a difference. Not all companies start their fiscal year in the same month, so comparing annual data for two companies isn’t always a like-to-like comparison. Comparing too large of a time period can also cause problems.

For example, a company’s income may have increased for the entire year, but looking at just annual sales could hide the fact that there was only positive income for part of the year.

How to calculate YoY change

The calculation for year over year change is simple and you can do it with just a calculator. You only need two pieces of information: the present and past value for whatever statistic you’re comparing. If you’re looking at the annual change in company revenue, you need to know the revenue figure for this year and last year. Here’s the basic formula:

(present value - previous value) ÷ previous value

Multiply your answer by 100 to get a percentage. If the answer is negative, there was a negative change year over year.

As an example, let’s say you want to find the growth of a company’s December revenue year over year. The company had revenue of $7,000 in December 2018 and $6,700 in December 2017. The company’s year-over-year growth rate is 4.5%:

($7,000 - $6,700) ÷ $6,700 = 0.045 or 4.5%

Learn more about the difference betweeen revenue and profit.

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