This straightforward measurement is an easy way for investors to analyze bullish or bearish trends
Earnings reports are one of the most closely watched events for investors in a particular stock. When a company beats revenue and/or earnings (profit) expectations, the stock will tend to climb. Conversely, if a company misses on one or both measures, the stock tends to fall.
However, what should investors do when a stock they own beats on both revenue and earnings yet drops after earnings? It depends on what the reason is, and there can be many reasons. The most benign reason is when a stock simply delivers a good report on a poor day for the broader market.
However, if investors look closely, they will generally find at least one tangible reason. One could be the company lowering their guidance for sales and profit in future quarters. But another reason could be found by comparing the company’s performance in its current quarter to its performance in the same quarter in the prior year.
This is called a year-over-year (YOY) comparison. And it’s a commonly used financial comparison that helps analysts and investors determine whether a stock’s outlook is improving, staying the same (static), or getting worse. In this article, we’ll help investors understand what the year-over-year comparison attempts to measure, the benefits of this measurement to investors, as well as how to calculate YOY when it’s not readily provided.
What is Year-Over-Year (YOY) and Why is it Important?
Year-over-year (YOY) is a frequently used comparison between two measurable events on an annualized basis. It’s sometimes referred to as year-on-year. When a company delivers its quarterly financial results, they will frequently cite how the current quarter compared to its performance from the same quarter in the previous year.
Sometimes YOY measurements are used for a specific month, a quarter, or for a full year. This leads to an important point. It’s important for investors to conduct an “apples to apples” comparison.
To illustrate this, let’s take a look at data from Coca-Cola (NYSE: KO) and its earnings report from April 2022 and its earnings report from April 2021.
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April 2021
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April 2022
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YOY Difference
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Earnings per share (EPS)
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55 cents
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64 cents
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16%
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Revenue
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$9 billion
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$10.50 billion
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16%
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The benefit for investors in using YOY data is that they can view the performance of a particular stock over a longer period of time. This helps to “smooth” results that can be affected by seasonal performance. For example, you might expect a company like Coca-Cola to deliver fairly consistent results throughout the year.
But what about a company like Mattel (NASDAQ: MAT)? This is a leading toy manufacturer and an investor might reasonably expect that the company’s financial performance would look stronger in the second half of the year than the first half of the year due to the increase in holiday shopping. Do the company’s financials bear that out?
Here are the results for the last two quarters of the year for the last two years:
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3Q/4Q 2021
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3Q/4Q 2022
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YOY Difference
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Earnings per share (EPS)
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95 cents/40 cents
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84 cents/53 cents
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-11%/32%
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Revenue
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$1.63 billion/$1.63 billion
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$1.76 billion/$1.79 billion
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7%/10%
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Now here are the results for the first two-quarters of the same years:
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3Q/4Q 2021
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3Q/4Q 2022
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YOY Difference
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Earnings per share (EPS)
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(0.56) cents/(0.26) cents
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(0.10) cents/.03 cents
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82%/88%
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Revenue
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$594.10 million/$732.10 million
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$874.20 million/$1.03 billion
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47%/40%
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From these charts, investors can get a more fair comparison that removes the seasonal effect that occurs every holiday season. Furthermore, in this small sample, they can see that earnings and revenue were growing from 2021 to 2022 even in the quarters that are generally “softer” for the company.
What is a Sequential Comparison?
You may also hear a company refer to its sequential results. This means they are comparing the results from its current quarter to results from the previous quarter. This may be useful for a company like Coca-Cola because investors would expect to see the company’s results be fairly consistent from one quarter to the next. Therefore, a dramatic change in sequential numbers may be more telling than a year-over-year number.
How Is YOY Different From YTD?
Analysts love their abbreviations and it can get confusing. YTD is an abbreviation for year-to-date. it simply provides a measurement in the current calendar year. So you may hear statements like Company X’s stock is up 10% YTD.
How to Calculate YOY
If a company doesn’t provide it, the calculation is very straightforward and can be done right on the calculator on your mobile device. You simply take the current year’s value and divide it by the prior year’s value and subtract 1.
If you want to compare a shorter time period, you would simply substitute data for those months and perform the same calculation.
What are the Limitations to a YOY Comparison?
The YOY comparison tells investors the what, but it doesn’t tell them the why. For that investors will need to listen to or read the transcript of the company’s earnings call and listen to other trusted financial analysts to get a better understanding of what a positive or negative YOY comparison means.
Some Final Thoughts on Year-Over-Year
In general, more data is better than less. And a year-over-year comparison especially if investors expand their view to several years can give investors a more accurate picture of the sales and earnings outlook for a company.
However, past results are not always indicative of future performance. It’s important for investors to continue to do their own due diligence when interpreting what the year-over-year data means for the future performance of a stock.
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