Is year over year a financial key performance indicator? Metrics and indicators are very important to managers and execs in many organizations and sectors.
The aim has always been to measure how things grow and how progress or retardation has occurred over a period of time.
Year over year or as some calls it, year on year, has been used for a long time to evaluate the performance of metrics that occur frequently. If it happens regularly then a year over year could just be involved.
Balance sheets, budgets, bottom-line, debt ratio, are all terms you must have heard or read about in finance, and if you haven’t read about this then year over year is one. If you would like to about a year over year, how a year over year is used, and situations where it applies, then this article is for you.
Table of Contents
- What does a year over year mean?
- What are the uses of a year over year?
- What is special about a year over year and how do I calculate it?
- Top-line, bottom-line, and year over year.
- What influences a year over year?
- Efficiency in a year over year.
- Differences Between Year over year and year to date
A year over year can be used by almost everybody, even those who don’t know its use well enough yet and the possibilities that abound can still find themselves using it to understand the numbers they have at hand if it is well explained.
The underlying barrier to using the year over year correctly or not at all is understanding its purpose, sourcing the data required, misapplication of what was sent, getting the proper context to prevent miscommunication, or perhaps total ignorance of the existence of a year over year.
If you work on Wall Street, a fortune 500, the accounting department of a company or organization, then the words year over year doesn’t ring a bell, I would be surprised.
Year over year is a key indicator for many to know if there has been growth or if what was presented on PowerPoint slides reveals the truth, and then can predict if the trend would continue or if to back away early.
A year over year can sometimes go from being a simple document to being a very complex one, and that depends largely on the individual or organization, nature of the work being reported, the risks involved in making certain business decisions, and what trends emerged or future predictions possible.
See Also: What Is Financial Planning And Analysis
What does a year over year mean?
Year over year analysis is a method of comparing various annualized sets of a company’s financial data from different years to discover how they have evolved.
It is similar to how we try to place similar data on a bar chart – placing values from an object of a particular nature with values from an object of similar nature from a different time frame side by side to see what level of transformation has occurred.
One thing that is certain in a year on year analysis is the importance of similar time frames. If the time frames in comparison do not match and aren’t the same, then a year over year would be futile and any results gotten would be known to be invalid.
Each data set must be from the same length of time in order to provide accurate context.
For example, one might look at how a company has performed in Q1 over the past four years; but it would be unhelpful to compare a company’s performance in Q1 2020 to that in June 2021 or in Q3 2019.
What are the uses of a year over year?
A year over year format is a useful tool for determining the direction in which a company’s financial performance is trending. These trends are very important to predict the likelihood of further growth of a company.
There are investors who would not invest in a company of the year over year does not tally with what they like to see. A year over year that reveals that a company is undervalued and has a tremendously long way to go in terms of earning potential, is the darling of many investors.
The question investors ask when they look at a year over year is, is the company’s revenue rising or falling? What about its financial obligations? Is the company’s bottom line holding constant in the face of the broader industry and economic trends?
The likes of Warren Buffet, the Oracle of Omaha, may not invest in a company if the year over year does not speak for itself. The ability of management to be able to manage a year over year is also an underrated value.
It shows that the management of a company is very keen on keeping costs low and increasing revenue.
The point of figures is this – whatever financial category it is, it can be compared year to year as long as it can be monitored over a set period of time.
What is special about a year over year and how do I calculate it?
Let’s say company GTY’s net profit in the second quarter of 2018 was $200,000, then climbed to $250,000 in the second quarter of 2019.
Subtract $250,000 from $200,000 to get the year-over-year percentage change, which is $50,000. The $50,000 gotten should then by divided by $200,000.
The next step would be to multiply the result of the division which is 0.25, by 100. That figure shows the increase in net profit year over year, expressed as a percentage change.
An analyst who has gone through this tidy process can now use that data to claim that company GTY’s bottom line increased by 25 percent (25%) from 2018 and 2019.
Let us also assume that company GTY ‘s net profit in the third quarter of 2018 was $250,000, and then dropped in the third quarter of 2019 to $200,000. When we subtract $200.000 from $250,000 to get the year on year percentage change, we get -$50,000.
The -$50,000 won should now be divided by $250,000. The next step would logically be to multiply the result by 100, which is -20%. This figure shows the decline in net profit year over year, expressed as a percentage change.
To give context to the non-finance people who may be reading this, company GTY’s net income, or the “bottom” figure on its income statement, is known as the bottom line.
The bottom line, more specifically, is a company’s profit after all expenses have been removed from revenues. Interest on loans, general and administrative costs, and income taxes are all included in these costs. The bottom line of a business is also known as net earnings or net profits.
The revenues or gross sales of a company or corporation are referred to as the top line. As a result, when a corporation has “top-line growth,” it means that total sales or revenues have increased.
A company’s net income, or the “bottom” figure on its income statement, is known as the bottom line.
The bottom line, more specifically, is a company’s profit after all expenses have been removed from revenues.
The most lucrative businesses are those that grow their top and bottom lines. More established businesses, on the other hand, may have flat sales or revenue for a given reporting period but might still improve their bottom line by cutting costs.
Management has the ability to implement measures that will improve the bottom line. Increases in income, or the top line, should, for starters, trickle down and benefit the bottom line.
This can be accomplished by increasing production, improving product returns, expanding product lines, or raising prices.
Other sources of revenue, such as investment income, interest income, leasing or co-location fees, and the sale of property or equipment, all help to boost the bottom line.
Now, it is important to understand the relationship between top-line, down-line, and year over year because what is reflected on the year over year calculations is what is stated in the bottom-line of the period of interest and across the range of interest, which is in turn influenced by the top-line.
What influences a year over year?
The bottom line of a business can be improved by cutting costs. Different input commodities or more efficient procedures could be used to manufacture a company’s products.
Increasing the bottom line can be accomplished through lowering wages and benefits, operating out of less expensive buildings, leveraging tax benefits, and minimizing the cost of capital.
For example, a company’s bottom line would benefit if it found a new supplier for raw materials that resulted in a cost savings of millions of dollars.
If a corporation’s bottom line shrinks from one period to the next, it means the company has experienced a drop in revenue or an increase in expenses. Although both of these metrics are useful in measuring a company’s financial strength, they are not interchangeable.
The bottom line measures a company’s efficiency in terms of expenditure and operational costs, as well as its ability to control total costs.
The top line, on the other hand, merely reflects a company’s ability to generate sales and ignores operational efficiency, which can have a significant impact on the bottom line.
Efficiency in a year over year.
All these metrics can be improved upon by research into what would work best. If research reveals a better way to make sales or improves massively on their product offerings leading to more sales, the top-line would improve and this would, in turn, influence the bottom-line.
If research reveals a better way of operating and managing efficiency costs, perhaps a simpler way of handling an industrial process that takes away the need to pay for many heavy machines, which also reduces the number of people needed to operate these machines, then the bottom-line would improve massively.
The fact is that for the meantime while this research is being carried out, the cost of carrying out this research would be seen on the bottom-line which would, in turn, affect the year over year negatively.
But if the result of the research is positive and brings out reduced cost, better sales, and greater efficiency, then the top-line and the bottom-lines would feel the impact.
Differences Between Year over year and year to date
Sometimes, a year over year and a year to date are used interchangeably and this is wrong because they describe two different things.
A year over year analysis is a method of comparing various annualized sets of a company’s financial data from different years to discover how they have evolved.
One thing that is certain in a year on year analysis is the importance of similar time frames. If the time frames in comparison do not match and therefore cannot be said to be the same, then a year over year would be futile and any results gotten would be known to be invalid.
The same cannot be said of a year to date and this is because they measure different things. A year to date is a collection of data derived from the end of the previous financial year to the current date of the report for Gross and Net Profits, Sales Revenue and Expenses, Assets and Liabilities.
These data are typically not audited and should only be used as a guide. They cannot be audited because they don’t comprise a full year in view and only give a glimpse of what has been done so far.
A year to date is like looking in the rearview mirror to see just how far you’ve come or how far the company has come in meeting the goals that it had set for itself.
It is while looking at a year to date that a company can decide if to change strategies because the previous strategy has failed, or because it is supposed to be a precursor to another strategy.
It is also while looking at a year to date that a company or organization can see trends emerging or the impact of certain actions such as new hires, machinery, seasonality of sales and decide if t proceed on course correction or to maintain the present direction and speed.
A year over year is very vital to a company that hopes to weather the storms of our ever-changing society and the world of business.
The formula to calculate a year over year is not complicated and can be calculated by anyone with the right details and data.