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Year over Year (YoY)

Guide to Understanding Year over Year (YoY) Growth

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Year over Year (YoY)

YoY Growth Formula

The objective of performing a year over year analysis 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?”

To formula used to calculate the year over year (YoY) growth rate is as follows.

Formula
  • Year over Year Growth = (Current Period Value / Prior Period Value) – 1

As shown above, the current period amount is divided by the prior period amount, and then one is subtracted to get to a percentage rate.

How to Calculate YoY Growth [Step-by-Step]

For example, if a company’s revenue has grown from $25 million to $30 million, 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%.

How to Interpret YoY Growth Analysis

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:

YoY Growth Calculator – Excel Model Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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YoY Growth Calculation Example

For our model, we’ll be assessing the annual growth rate for the following two metrics:

  1. Revenue (i.e. Sales)
  2. 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%

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.

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.

YoY Growth Calculator

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Efrain
Efrain
October 1, 2022 8:10 pm

Great presentation!!!

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