Year-over-year (YOY) growth is a critical metric for any business or investment to measure progress and success. It indicates how much a business or investment has grown or declined over a year, and it’s a crucial factor for decision-making and strategic planning. YOY growth can help businesses identify strengths and weaknesses, opportunities and threats, and set realistic goals for the future.
In this article, we’ll discuss how to calculate year-over-year growth using various methods, including percentage change, compound annual growth rate (CAGR), and more.
Method 1: Percentage Change
Percentage change is a straightforward method to calculate year-over-year growth. It measures the difference between two values as a percentage of the initial value. Here’s the formula:
Percentage Change = ((Current Year Value – Previous Year Value) / Previous Year Value) x 100
For example, let’s say a business earned $100,000 in revenue last year and $150,000 this year. Using the formula, we get:
Percentage Change = (($150,000 – $100,000) / $100,000) x 100 = 50%
This means that the business’s revenue grew by 50% over the past year.
Method 2: Compound Annual Growth Rate (CAGR)
CAGR is a more complex method to calculate year-over-year growth, but it’s a more accurate representation of the growth rate over multiple years. CAGR measures the average annual growth rate over a specified period, assuming that the growth rate is constant. Here’s the formula:
CAGR = ((Ending Value / Beginning Value) ^ (1 / Number of Years)) – 1
For example, let’s say a business earned $100,000 in revenue in 2019, $120,000 in 2020, and $150,000 in 2021. Using the formula, we get:
CAGR = (($150,000 / $100,000) ^ (1/3)) – 1 = 17.97%
This means that the business’s revenue grew by an average of 17.97% per year over the past three years.
Method 3: Simple Average Growth Rate
Simple average growth rate is another method to calculate year-over-year growth, which is similar to CAGR, but it assumes that the growth rate is not constant. Here’s the formula:
Simple Average Growth Rate = (Total Percentage Change / Number of Years)
For example, let’s say a business earned $100,000 in revenue in 2019, $120,000 in 2020, and $150,000 in 2021. Using the percentage change formula from method 1, we get:
Percentage Change 2019-2020 = ((120,000 – 100,000) / 100,000) x 100 = 20% Percentage Change 2020-2021 = ((150,000 – 120,000) / 120,000) x 100 = 25%
Total Percentage Change = 20% + 25% = 45%
Simple Average Growth Rate = 45% / 2 = 22.5%
This means that the business’s revenue grew by an average of 22.5% per year over the past two years.
Method 4: Moving Average Growth Rate
Moving average growth rate is a method that calculates the average growth rate over a specified period, which moves from year to year. It’s useful for smoothing out short-term fluctuations and identifying long-term trends. Here’s the formula:
Moving Average Growth Rate = (Sum of Percentage Changes over a Specified Period / Number of Years in that Period)
For example, let’s say a business earned $100,000 in revenue in 2018, $120,000 in 2019, $150,000 in 2020, and $170,000 in 2021. We can calculate the moving average growth rate for a two-year period as follows:
Moving Average Growth Rate for 2019-2020 = ((150,000 – 120,000) / 120,000) x 100 = 25% Moving Average Growth Rate for 2020-2021 = ((170,000 – 150,000) / 150,000) x 100 = 13.33%
Moving Average Growth Rate = (25% + 13.33%) / 2 = 19.17%
This means that the business’s revenue grew by an average of 19.17% per year over the two-year period from 2019 to 2021.
Method 5: Geometric Mean Growth Rate
The geometric mean growth rate is another method to calculate year-over-year growth, which is suitable for data with different growth rates over time. It calculates the average growth rate for each year, assuming a compounding effect. Here’s the formula:
Geometric Mean Growth Rate = (Ending Value / Beginning Value) ^ (1 / Number of Years) – 1
For example, let’s say a business earned $100,000 in revenue in 2019, $120,000 in 2020, and $150,000 in 2021. Using the formula, we get:
Geometric Mean Growth Rate = ((150,000 / 100,000) ^ (1/3)) – 1 = 17.97%
This means that the business’s revenue grew by an average of 17.97% per year over the past three years.
Conclusion
Calculating year-over-year growth is an essential task for businesses and investors to measure progress and plan for the future. There are different methods to calculate year-over-year growth, including percentage change, compound annual growth rate (CAGR), simple average growth rate, moving average growth rate, and geometric mean growth rate.
Each method has its advantages and limitations, and the appropriate method depends on the data and the purpose of the analysis. By understanding these methods and using them appropriately, businesses and investors can make informed decisions, set realistic goals, and achieve success.
Your Wolf Academy offers a range of educational resources to help traders succeed, including free signals, technical analysis, and weekly webinars. Sign up today and get a recommendation for a regulated brokerage company that suits your needs.
