The economic indicator called YOY (year-over-year) helps to compare the statistics of one year compared with the previous period. Often, it can be periods per month or year. In turn, the growth rate throughout 12 months is calculated as a percentage for the entire year. Today, we shall analyze YOY: meaning, examples, calculation and see its pros and cons.
After reading our article, you will know everything that will help you to understand the economic indicator YOY. What is more valuable, you will find out the formula of how it is calculated. Are you ready? Go on reading and make notes if necessary.
Such an indicator is the most effective tool for analysis, since it eliminates seasonal factors, and is also excellent for analyzing long-term trends. For example, if your business shows a stable growth rate of 3% monthly, and last year in the same month the rate was 4%, then it is logical that the growth rate decreased.
That is why it is so important to understand the meaning of YOY and which method is used for financial analysis, as well as which period is chosen for comparison. It may be:
- A year
- A quarter
- A month
- A week
- A day
Now we will try to highlight the main pros and cons of this type of analysis.
Positive sides of YOY
- Lack of seasonal factors, since the comparison is made precisely for periods.
- Leveling volatility within the year.
- Ease of settlement. All you need to know is the financial indicator for the same period of the last year.
- The index itself is expressed as a percentage.
Negative sides of YOY
- The results are almost impossible to analyze if one of the periods has a negative value.
- Sometimes it may overstate performance if trends are observed on the market for several periods.
- If annual indicators are used in reports, there is a chance not to notice the negative patterns occurring during the month.
- There is a straightforward limitation in the information received.
- Inability to use this indicator with other metrics.
The formula for YOY calculation in the annual period
In order to make calculations for a yearly period, we need two indicators and a calculator itself.
The calculation sequence is as follows:
- You need to subtract the sales figures for the last year from those obtained for the current year. If as a result, you get a positive indicator, it will mean nothing more than growth. For example, if last year you sold 200 suits, and this year 220, then the growth rate will be 20 suits.
- Next, we need to divide the difference in costumes sold by the number of suits of the current year and the entire past year. In other words, it looks like this: 20/200. The result is your growth rate.
- For ease of understanding, the resulting figure will need to be converted to percentages. That is, 20/200 = 0.1 or 10%
One more example
This time we will try to calculate the employment rate of the population for the annual period. For example, in June 2018, the total employment of the population left 500,000 people. The same figure for the last year's period (June 2017) was 590,000. Now we will try to calculate the rate of growth/decline in employment over one year. The calculation will be as follows:
- From 500,000 we subtract 590,000, and we get (-90,000) people
We divide (-90,000) by 590,000 and get (-0,15) or (-15%). That is, the rate of unemployment increased by 15% compared to last year.
Examples of the YOY formula indicator by government authorities
Almost all government agencies use annual or quarterly figures in their reports. To carry out such calculations, it will be necessary to use the following main economic factors:
- Durable goods
- Jobs in manufacturing industries
- GDP or Gross Domestic Product - shows the growth rate of the economy for the last quarter
As you can see, the YOY indicator is significant for calculating the annual or quarterly growth rate. If you are planning to make a comparison over a shorter period, let’s say a month or a week, then you should pay attention to other analysis tools, as in the case of a long period the most important advantage is the absence of seasonal market fluctuations.