What is YoY?
Year over Year (YoY) growth measures the change in an annualized metric over two comparable periods, most often the current and prior period, as of the fiscal year-end date.
By comparing a company’s current annual financial performance to that of 12 months back, the rate at which the company has grown as well as any cyclical patterns can be identified.
- YoY stands for “year-over-year” and measures the rate of change in a metric across two comparable periods.
- The YoY can be used to analyze the annual growth in a company’s financial metric, such as revenue growth.
- The YoY metric is most often used to determine the growth rate over the prior period, i.e. the rate of growth at which the financial metric grow by to reach the ending period value.
- The formula to calculate the YoY growth rate is to divide the current period balance by the beginning period balance, and then subtracting by one.
How to Calculate YoY Growth?
YoY stands for “year-over-year”, and measures the rate of growth in a specific metric over two comparable periods, such as the current and prior period.
The objective of performing a year over year growth analysis (YoY) is to compare recent financial performance to that of historical periods.
The question being answered is, “Has our business been growing at a faster pace than the previous year, or has our growth been slowing down in recent years?”
In order to compute the YoY growth rate, the current period amount is divided by the prior period amount, and then one is subtracted to get to a percentage rate.
The formula used to calculate the year over year (YoY) growth rate is as follows.
- Current Period → End of Period (EoP)
- Prior Period → Beginning of Period (BoP)
Quick YoY Growth Calculation Example
For example, if a company’s revenue has grown from $25 million in Year 0 to $30 million in Year 1, then the formula for the YoY growth rate is:
- YoY Growth (%) = ($30 million / $25 million) – 1 = 20.0%
Alternatively, another method to calculate the YoY growth is to subtract the prior period balance from the current period balance, and then divide that amount by the prior period balance.
- YoY Growth (%) = ($30 million – $25 million) / $25 million = 20.0%
Under either approach, the year over year (YoY) growth rate comes out to 20.0%, which represents the variance between the two periods.
What is a Good YoY Growth Rate?
The main benefit of YoY growth analysis is how easy it is to track and compare the growth rates across several periods, which, if annualized, removes the impact of monthly volatility.
Plus, any cyclical patterns will become apparent if the historical results reflect a full economic cycle.
While the intuition is easy to grasp for the two basic rules, you must perform deeper diligence into the company’s growth trajectory to identify the core underlying drivers behind the change before arriving at a definitive conclusion.
- Increased YoY Growth → Positive
- Decreased YoY Growth → Negative
To provide a brief example, consider a company whose revenue growth rate in the past year was 5%, but the growth rate is only 3% in the current year.
However, the quality of the revenue being generated could have improved despite the slightly lower growth rate (e.g. long-term contractual revenue, less churn, fewer customer acquisition costs).
It would be incorrect to assume that the current year was necessarily “worse” than the prior year without a deeper dive analysis.
In addition, another important consideration is that growth inevitably slows down eventually for all companies.
Mature companies with established market shares are less likely to fund growth and instead are more inclined to focus on:
- Issuing Dividends to Shareholders
- Improving Operational Efficiency
- Existing Customer Retention vs. New Customer Acquisitions
YoY Growth Calculator
We’ll now move to a modeling exercise, which you can access by filling out the form below.
1. Revenue and EBIT Growth Assumptions
For our model, we’ll be assessing the annual growth rate for the following two metrics:
- Revenue (i.e. Sales)
- Operating Income (EBIT)
First, we’ll begin by projecting the revenue and EBIT of our company using the following assumptions.
- Revenue YoY Growth = +4%
- EBIT YoY Growth = -3%
2. Revenue and EBIT Projection
If we multiply the prior period balance by (1 + growth rate assumption), we can calculate the projected current period balance.
For example, in Year 0 (12/31/21), the revenue is $100m, so the next period’s revenue is $104m after applying the 4% YoY growth assumption.
Once we perform the same process for revenue in all forecasted periods, as well as for EBIT, the next part of our modeling exercise is to calculate the YoY growth rate.
3. YoY Calculation Analysis Example
Here, by dividing the current period amount by the prior period amount and then subtracting 1, we arrive at the implied growth rate.
In Year 1, we divide $104m by $100m and subtract one to get 4.0%, which reflects the growth rate from the preceding year.
As we can see, the trends in a company’s yearly performance can be observed, which allows for a better understanding of its recent growth trajectory, the current stage of the company’s lifecycle, and cyclical trends.
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