Year-over-year (YoY) analysis is a powerful financial analysis tool that allows you to directly compare performance between two periods. In this article, we explain what YoY analysis is, how it's calculated, and why it's useful. We also discuss the pros and cons of YoY analysis and how to calculate YoY growth in Excel. Whether you're a financial analyst, investor, or business owner, understanding YoY analysis can help you spot trends and make informed decisions.
What is Year-over-Year (YOY)?
YoY stands for Year over Year and is a type of financial analysis used to compare the results of a period in a year with the same period the previous year.
YoY analysis is widely used in financial and economic analysis to help quickly understand year-to-year growth trends.
Year-over-year formula
The formula for YoY is defined as current year value divided by previous year value minus 1.
For example, if a property had a net operating income of 120,000 last year and a net operating income of 105,000 the year before that, the year-over-year growth rate would be 120,000 / 105,000 -1, or 14.3%.
Another YoY formula is to subtract the previous value from the current value and then divide the result by the previous value.
Using the same example, you can calculate the year-over-year growth rate by subtracting the prior year's net operating income of 105,000 from the net operating income of 120,000 and dividing the result by 105,000. In this case, the year-over-year growth rate is (120,000 – 105,000) / 105,000, which is a 14.3% year-over-year growth rate.
The YoY formula can also be used to calculate growth amounts, current values, or previous values. For example, if the average rent in a particular area is currently 1,100 and YoY growth is reported as 10%, then the average rent last year was 1,100 / (1 + 10%), or 1,000.
How to Calculate Year-over-Year Growth Rate
Let's take a closer look at how to calculate year-over-year growth over several years to identify trends. Let's say you have a real estate pro forma that looks like this:
The year-over-year growth calculation for the Cash Flow Before Tax (CFBT) item is shown at the bottom. The year-over-year calculation from Year 1 to Year 2 is 5.9%, which means that Cash Flow Before Tax increased by 5.9% year-over-year.
From year 2 to year 3, the growth rate is 3.0% compared to the previous year. In year 4, the growth rate is 4.4% compared to the previous year, and in year 5, the growth rate is 4.9% compared to the previous year.
You can calculate year-over-year growth rates for any other item in the same way. This will tell you how each item is growing from year to year, which can help you spot trends. For example, if you calculate the year-over-year growth rates for operating expenses and total potential revenue, you'll quickly see that one is growing faster than the other.
How to calculate year-over-year growth rate in Excel
Calculating year-over-year growth rate in Excel is easy: Let's say you have the historical revenue of a small tenant and you want to calculate the year-over-year growth rate in Excel.
Once you have the values you want to use to calculate the year-over-year growth rate, simply apply one of the two year-over-year growth rate formulas outlined above. Note that we skip the first year because our data set doesn't have a previous year to compare it to.
Meaning of YOY
What does YoY mean? Year-over-year (YoY) indicates the percentage increase or decrease from one year to the next. Generally, the higher the year-over-year growth rate, the better. However, there may be other factors that are more important to consider.
For example, you are reviewing a tenant's interim financial statements and notice a decline in year-over-year growth. At the same time, you also know that the tenant has secured a large, multi-year contract with the IRS that will provide stable revenue for the next 10 years.
In this case, there is another factor of financial performance that is more important in a tenant's credit analysis than year-over-year revenue or net income growth: a more stable income stream may be preferable to a tenant, even if revenue growth is lower.
Why YoY is useful
Year-over-year calculations are useful because they allow direct comparisons to the same period last year, which is especially helpful if your business has seasonality or cyclicality.
For example, say you're evaluating your hotel's historical sales reports and see a significant month-over-month decrease from March to April of last year. While this might be concerning at first, when you compare it to March of the previous year, you might find that your revenue is actually increasing year-over-year.
One reason this may occur is because there may be a large local event, such as a golf tournament, held in March each year. This event may bring in large crowds each March, increasing the demand for hotel rooms. In this case, a month-to-month comparison with April after the event is not as meaningful as a year-over-year analysis.
A YoY analysis allows you to compare your results from March of the current year to March of the previous year to see how much your revenue has increased or decreased over the same time period that your golf tournaments are held each year. This YoY analysis eliminates any monthly or quarterly fluctuations in your analysis.
Pros and cons of year-over-year analysis
Year-over-year (YoY) analysis is a useful tool in financial analysis, but it is important to understand both its benefits and limitations. Advantages of using YoY analysis to evaluate financial performance include ease of calculation, apples-to-apples comparisons, and the potential to identify trends. However, it is also important to consider limitations of YoY analysis, such as its inability to consider all relevant factors.
Year-over-year benefits:
Easy to calculate Allows comparisons with the same period last year Helps you spot trends
Year-over-year disadvantages:
It doesn't take into account all the factors involved, such as stability at the expense of growth.
Conclusion
In this article, we discussed year-over-year (YoY) analysis. Year-over-year analysis is used to compare the results of one period, such as a month, to the same period last year. Year-over-year analysis is useful because it eliminates cyclicality or seasonality that occurs throughout the year.