Trillionaire Term of the Day - March 4, 2009 - YOY

Year Over Year

One of the single most popular methods of evaluating investments and other financial indicators is to analyze year over year (YOY) changes. Analysts, writers, and other members of the financial world tend to use this method without explaining its meaning. We’re here to help.

When you hear that a stock’s 4Q revenue increased 10% year over year in 2008, this means that their revenue in the 4^th quarter of 2008 was 10% higher than their revenue in the 4^th quarter of 2007. 

To give you an understanding of how the percentage change is found, let’s calculate the year over year change in February car sales for General Motors (GM). The automaker reported that it sold 126,170 cars last month. From reading the company’s 2007 financial report, I learned that GM sold 268,737 cars in February of 2007. 126,170 is 47 percent of 268,737 (simply divide the first number by the second). So we know that there was a 53% drop in GM’s February sales year over year.

But why would we use year over year data instead of analyzing sequential monthly or yearly change? Consider companies that make profits based on retail sales. Sales for these companies, for the most part, are much higher in the 4^th quarter than in any other quarter of the year. End of the year holiday shopping substantially drives revenue up for most retail companies. If we want to measure how well a retail company is doing, we can compare 4^th quarter statistics year over year with the 4^th quarter numbers of a different year. In this case, simply analyzing the percentage change in sales from the 3^rd quarter to the 4^th quarter would not give us effective information to evaluate.

This form of measurement has become prevalent in the investing world because it is a good method of isolating performance for a specific period of time. We can compare every kind of change on a year-to-year, month-to-month, or even day-to-day basis.

 

-Matt Schwartz

College Trillionaire