YoY Growth

What is YoY growth?

YoY growth (year over year growth, growth against the same period of the previous year) is the percentage change in a key figure compared with the same period of the previous year. Periods of equal length with the same position in the year are compared: a month with the same month of the previous year, a quarter with the same quarter of the previous year, a financial year with the preceding one. This removes influences that occur at the same time every year, such as a regularly weak August. In German, the measure is usually called Vorjahresvergleich or Wachstum gegenüber Vorjahr.

The year-over-year comparison is the basic form of growth measurement in annual financial statements, controlling and investor communication. The German Commercial Code (Handelsgesetzbuch, HGB) requires the amount for the preceding financial year to be stated for every item in the balance sheet and the income statement (Section 265(2) HGB). Many business management evaluations, the monthly reports from bookkeeping, also set the current values against those of the previous year. In funding rounds and company sales, investors and acquirers base the valuation, among other things, on revenue growth compared with the previous year.

Calculating YoY growth: formula and comparison periods

The calculation rule is the same as for any growth rate.

Formula: YoY growth = (value of the current period ÷ value of the prior-year period) − 1, stated as a percentage

Differences arise from the choice of period:

• Same month and same quarter of the previous year: show the development within the year without the influence of constant seasonal patterns.
• Last twelve months (LTM): the sum of the most recent twelve months is compared with the twelve months before and updated at the end of every month or quarter. This view is widespread in valuation and company acquisitions.
• Reporting-date values: for annual recurring revenue (ARR), the value of all current subscriptions extrapolated to one year, the value at the end of the period is compared with the value twelve months earlier.
• Financial year: comparison of the revenue of two annual financial statements. If the previous year was a short financial year (Rumpfgeschäftsjahr), for example after incorporation or a change of the financial year, it covers fewer than twelve months and is not comparable without adjustment.

ARR growth at year end and the growth in revenue for the same year usually match only if the percentage growth pace remains the same over both years. If growth accelerates, the rate on the reporting date is above the revenue rate; if it weakens, it is below.

Conversion into monthly rates and growth over several years (CAGR)

For conversion into monthly growth (MoM growth), the compound interest rule applies in the reverse direction: (1 + annual rate) to the power of (1/12), minus 1. Annual growth of 30% corresponds to around 2.2% per month, a doubling to around 5.9%. Simple division by twelve overestimates the monthly growth required because it neglects compounding.

Over several years, growth is stated as the compound annual growth rate (CAGR).

Formula: CAGR = (ending value ÷ starting value) to the power of (1 ÷ number of years) − 1

Put simply, it is the constant annual growth that leads from the starting value exactly to the ending value. The rate smooths out fluctuating individual years and is the usual form in which planned growth is summarised in the business plan and the financial model.

The arithmetic mean of individual annual rates, that is, their sum divided by the number of years, is unsuitable for this. With fluctuating rates, it is always above the actual average growth and leads to inflated values when projected forward. This is shown by a year with plus 100% and a following year with minus 50%. The arithmetic mean is 25%, but the value ends up exactly back at the starting value, and the CAGR is 0%.

Distortions from base, one-off effects and acquisitions

Base effect

The rate depends on the prior-year value just as much as on the current value. If the same quarter of the previous year was unusually weak because of the loss of a major customer, growth appears high without the business having improved; an unusually strong previous year, conversely, looks like a slowdown. For the same reason, rates are very high in the first years after market entry and inevitably decline later.

Shifted seasonality

The year-over-year comparison evens out seasonal patterns only if they run the same way in both years. If an effect shifts between the periods, for example through the position of public holidays, a rescheduled trade fair or the switch of contract terms to the calendar year, it distorts this comparison as well.

One-off effects, acquisitions and accounting changes

One-off projects, licence sales or retrospective invoicing in one of the two periods are stripped out in an adjusted rate. Revenue of acquired companies has to be separated from organic growth, and in international business the figures are often also adjusted for currency effects. A changed accounting treatment also shifts the basis of comparison, for example for platforms the switch from gross presentation (the entire amount brokered counts as revenue) to net presentation (only the company's own commission). The prior-year value is then determined under the new method.

YoY growth in valuation, funding rounds and company acquisitions

For fast-growing companies, revenue growth compared with the previous year largely determines which revenue multiple is applied, that is, at what multiple of revenue the company is valued. Together with the earnings margin, it forms the Rule of 40: growth rate and earnings margin, both in percent, should add up to at least 40. In addition to the current rate, investors look at its development over several quarters: persistently declining growth is assessed differently from a single weak quarter with an explainable cause.

In due diligence, the reported growth is broken down: recurring and one-off revenue, new customers and existing customers, price and volume effects, organic and acquired growth. If planned growth is significantly above the adjusted historical rate, buyers demand a justification based on the sales pipeline, pricing measures or new markets. Alternatively, they shift part of the purchase price into an earn-out.

Worked example: adjusting YoY growth and calculating CAGR

A provider of software for logistics companies achieves revenue of EUR 1,500,000 without one-off effects in the third quarter of the previous year and EUR 2,100,000 in the third quarter of the current year. This includes a one-off introductory order of EUR 150,000. The second quarter was at EUR 2,000,000 in the current year and at EUR 1,550,000 in the previous year, in each case without one-off effects.

• Unadjusted growth: 2,100,000 ÷ 1,500,000 = 1.40; minus 1 = 40.0%
• Adjusted quarterly revenue: 2,100,000 minus 150,000 = EUR 1,950,000
• Adjusted growth: 1,950,000 ÷ 1,500,000 = 1.30; minus 1 = 30.0%
• Monthly equivalent: 1.30 to the power of (1/12) = 1.0221; minus 1 = 2.2%
• Comparison with the previous quarter: 1,950,000 ÷ 2,000,000 = 0.975; minus 1 = minus 2.5%
• The same comparison in the previous year: 1,500,000 ÷ 1,550,000 = 0.968; minus 1 = minus 3.2%

The decline against the previous quarter points to a seasonal effect, because it occurs in both years. The year-over-year comparison shows that the business is growing, and the one-off effect explains ten percentage points of the reported rate.

Viewed over several years, the same company reports the following annual revenue for years 1 to 4: EUR 4.0 million, EUR 5.6 million, EUR 6.4 million and EUR 8.0 million.

• Individual annual rates: 5.6 ÷ 4.0 minus 1 = 40.0%; 6.4 ÷ 5.6 minus 1 = 14.3%; 8.0 ÷ 6.4 minus 1 = 25.0%
• Arithmetic mean: (40.0 + 14.3 + 25.0) ÷ 3 = 26.4%
• Compound annual growth rate over three annual steps: 8.0 ÷ 4.0 = 2.0; to the power of (1/3) = 1.2599; minus 1 = 26.0%
• Check: EUR 4.0 million × 1.2599 to the power of 3 = EUR 8.0 million; with the arithmetic mean, the result would be 4.0 million × 1.264 to the power of 3 = around EUR 8.1 million

Planning with the arithmetic mean of 26.4% overestimates the ending value by around EUR 78,000 after only three years. The more the individual years fluctuate, the larger this deviation becomes. Planning and valuation therefore work with the CAGR.

Distinctions: YoY growth, MoM growth, organic growth, run rate

• MoM growth: compares with the immediately preceding month. The rate shows the current pace but contains seasonal fluctuations in full.
• Organic growth: growth without acquisitions and disposals, often also adjusted for currency effects. A company's own sales performance is measured by this figure.
• Run rate: the extrapolation of a short period, such as one month, to a year. It describes a level, not growth.

Common mistakes

• Percentages without absolute values. A rate can be put into context only together with the amounts of both periods, because the same percentage on a different base describes very different increases.
• Unequal periods. A short financial year, a different number of working days or a shifted billing cycle make periods incomparable if they are not adjusted.
• Leaving one-off effects in the comparison. A large project in one of the two periods distorts the rate; it is identified and stripped out in an adjusted rate.
• Presenting acquired growth as one's own. Revenue of acquired companies raises the rate without saying anything about sales performance.
• Mean instead of average rate. The arithmetic mean of fluctuating annual rates overstates actual growth and leads to inflated values in planning.

Frequently asked questions

How is YoY growth calculated?

The value of the current period is divided by the value of the same period of the previous year, and 1 is subtracted from the result. Revenue of EUR 1.3 million in the third quarter after EUR 1.0 million in the same quarter of the previous year gives 30%. In Excel, with the prior-year value in A2 and the current value in B2, the formula is: =B2/A2-1, in percentage format.

What is good YoY growth?

That depends on size, stage and margin. High rates on a small base are easier to achieve than moderate rates on a large base. The Rule of 40 therefore assesses growth together with the earnings margin. For example, 25% growth at a 20% margin gives the same value of 45 as 60% growth at a minus 15% margin.

How is a short financial year included in the comparison?

Not directly. If the previous year covers only eight months, for example, the comparison of the annual financial statements is not meaningful. Equal calendar months of both years or the values of the last twelve months are then compared; an extrapolation of the short year to twelve months has to be identified as such.

From what history is the year-over-year comparison possible?

A first monthly comparison is possible after 13 months, and a reliable series of year-over-year comparisons emerges after about two years. Until then, the monthly series is the more important source of information.

The Roemer Capital view

For investor documents, Roemer Capital prepares growth compared with the previous year in two versions: as reported and adjusted for one-off effects, acquisitions and accounting changes. Both versions show the amounts of both periods and a reconciliation. Investors check this reconciliation in due diligence; if it is already in the data room, the follow-up question is not needed.

In a company sale, which usually takes 6 to 12 months, Roemer Capital presents the growth series on the basis of the most recent twelve months at every quarter end. Buyers read from it whether growth is holding, and the plan in the financial model has to connect to this trend. Roemer Capital explains a decline in the series before the first offer, so that it does not first become an issue in the purchase price negotiation.