How to Calculate Year-on-Year Growth Percentage?

Calculating year-on-year change is one of the fundamental techniques used to understand how a financial item evolves over time. This calculation is fairly easy to grasp, apply, and keep track of, which explains its significant popularity in finance and other business-related fields.

What is Year-on-Year Growth?

Year-on-year (YOY) assessment analyzes an indicator by comparing its performance over two or more corresponding time intervals. An organization may evaluate a company’s revenue, sales, site traffic, costs, staff turnover, and so on, as against the same metric’s performance for a comparable previous period. Practically, a firm might choose to analyze any kind of information they deem necessary, as long as it is quantifiable. And so, when we estimate a relative measure like percentage growth, we are able to compare items of different size.

How Do You Calculate Year-on-Year Growth Percentage?

Suppose that someone asked you, “Which company is growing faster – Google or Microsoft?” To answer this question, you decide to look up both companies’ revenues. This is what you find out:

You notice that Google’s revenue grew by $25 billion in a year. Microsoft, on the other hand, saw a $15.5 billion increase. So, which company grew faster?

In absolute terms, Google’s revenue rose faster. However, we can’t be certain that this will be the same in relative terms, given that Microsoft starts from a lower base value. That’s when we estimate a company’s year-on-year (YOY) growth percentage. We use the following formula:

Year-on-year~growth~\%= \frac {(Current~value - Previous~value)}{Previous~value}

Mathematically, this can be expressed as:

Year–on–year~growth~\%= \frac {Current~value}{Previous~value}-1

For Google, this is:

Year–on–year~growth~\%~Google = \frac {(\$161.8bn - \$136.8bn)}{\$136.8bn}=18.2\%

Regarding Microsoft, we obtain:

Year–on–year~growth~\%~Microsoft =\frac {(\$125.8bn - \$110.3bn)}{\$110.3bn}=14\%

After all, we can confirm that Google grew faster than Microsoft between 2018 and 2019 in both – relative and absolute terms.

Calculating period-to-period growth for different time frames

In some situations, practitioners use the same formula to calculate the growth between periods that are different than a year. If you are running a start-up or pondering whether to invest in one, it makes sense to consider month-to-month growth for several months in a row, because a full year could be too far in the past. In a start-up dynamic, things change very rapidly, and stakeholders have double-digit expectations about month-to-month growth.

So, how do we calculate month-to-month growth if a start-up had $1.1 million ARR in March, and $1.4 million ARR in April? We apply the same principle as earlier, but this time the reference period is months, and not years:

Month–to–month~growth~\% =\frac {(Revenue~April - Revenue~March)}{Revenue~March}=\frac {(\$1.4bn - \$1.1bn)} {\$1.1bn} = 27\%

Which is the optimal reference period to choose for your growth percentage calculations?

There isn’t one. It really depends on the specific situation you are in. If you calculate annual growth rates, this helps mitigate seasonality patterns because all twelve months in a year are considered.

Nevertheless, it takes some time to see year-on-year growth figures. If you are in November, for instance, the last available year-on-year growth rate is quite outdated – you have seen additional eleven months unfold. That’s why month-to-month, or quarter-to-quarter growth are sometimes perceived to be optimal for analysts, too.

Is it possible for a company to experience negative growth?

Of course, it is. If sales in 2020 were $5 million and you had $6 million back in 2019, then we can say that your growth rate was equal to:

Year–on–year~growth ~\% =\frac {(Revenue~2020 - Revenue~2019)} {Revenue~2019} =\frac {(\$5~million - \$6~million)} {\$6~million} = -16.6\%

How to calculate a company’s average growth for several years’ time frame?

Apart from the YOY, there is a popular technique that allows you to calculate average growth instead. It is called Compound Annual Growth Rate (CAGR). We’ll show you how to apply it in a next blog post.