The longer time horizon puts data into a better perspective when considering how well an economy or an investment is doing. Let’s take a closer look at what year-over-year means and how it works.
Definition and Examples of Year-Over-Year
Year-over-year is a growth calculation commonly used in economic and finance circles. Comparing how a variable does from one year to the next is an important way for a company to know whether certain areas of its business are growing or slowing down. One advantage of a year-over-year measurement is that it takes out fluctuations that may occur monthly. Many companies see an uptick in sales in November and December for the holiday season. If a company reported a 35% increase in revenue in December, the data would provide less insight than a report showing that revenue increased 20% in the most recent December to December period. The latter period is a year-over-year measure that indicates revenue is growing on a yearly basis rather than just for the holiday season. A simple formula is used to calculate the year-over-year growth for any economic or financial variable. You would use the following formula for finding GDP year-over-year: This would give you the percent change in GDP from 2022 to 2021, or the year-over-year growth in GDP.
How Does Year-Over-Year Work?
Many government agencies report economic data using year-over-year calculations to explain economic performance over the past year. Year-over-year calculations are easy to interpret, allowing for easy comparison over time. Some of the primary economic data reported this way are the consumer price index, gross domestic product, unemployment rates, and interest rates. Businesses will also use year-over-year data to calculate key financial performance metrics. Economic data is often shown using year-over-year calculations, but government agencies may also choose to take a monthly growth rate and annualize it. When a percent change is annualized, the monthly growth rate of a specific variable is used to see how it would change over a year if it continued to grow at that rate. This is commonly done for data that isn’t seasonal. Year-over-year is a helpful calculation for businesses and investors to look at, but it shouldn’t be the only calculation they use. Sometimes, breaking down revenue or investment returns by month can be useful. A particularly strong month might be smoothed out when you’re only looking at yearly numbers. But a really bad month for the business could also be overlooked if only year-over-year measurements are used. Another issue with year-over-year calculations is that they can’t fully explain the details behind economic or business growth. Year-over-year measures reveal trends, but they don’t provide enough information to explain why these trends are occurring.
How to Interpret YOY Calculations on an Investment Statement
Most companies provide an investment statement. An excellent example of this is Meta’s (formerly Facebook) 2021 financial highlights from its investor page. The statement shows the year-over-year changes for a three-month period from the end of 2021 and the period December 2020 to December 2021. The statement also shows that Meta’s net income from 2021 was $39.4 billion and $29.1 billion in 2020. This is a 35% year-over-year increase—which means its net income rose significantly over that year-long period. Meta made $10.3 billion in the final three months of 2021, but it made $11.2 billion over the same period in 2020 for a year-over-year change of -8%. This indicates that Meta’s net income over the past year has grown significantly, but this growth had to come from the first nine months of the year because the last three months’ net income year-over-year was down 8%.
