What is YoY?
Year over Year (YoY) growth measures the change in an annualized metric across two comparable periods, typically the current period and the 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.
How to Calculate YoY Growth (Step-by-Step)
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)
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.
YoY Growth Analysis: Understanding Variance (Percent Change)
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: