Understanding financial reporting
Every company wants to report good revenue because stock markets react well to good performance. In good times, small companies will report small revenues while big companies will report big revenues. So how do we measure what’s good and what’s not?
If you ponder upon some stock analysis reports, you’ll always get to see terms like YOY or QOQ. YOY basically stands for Year Over Year or some call it Year On Year. QOQ stands for Quarter Over Quarter or Quarter On Quarter.
The market likes to compare and they are very sensitive to company performance announcements. It is critical to know the YOY and QOQ financials as the market reacts quickly upon announcements as they will use it as a gauge on the company’s performance.
YOY basically means comparing with the previous year. For example if company XYZ reported its Q3 results with an increase of 10% in revenue YOY, this refers to a comparison with the previous year in Q3. The YOY comparison is good measurement as it takes away cyclical business factors. An illustration can be like a toy manufacturer, which tends to see big sales in Q4 due to the Christmas season and this cycle repeats itself every year.
QOQ financial performances is a quicker measure of a company’s performance but as explained above, it does not factor in cyclical business factors. And therefore may not provide a clear indication of a company’s performance in the longer term. It is usually used in conjunction with YOY comparisons. However, QOQs plays a bigger role and are usually closely watched especially when a company is new or in times of a recovery.
For a new company with not much historical background, their performance can only be gauged with QOQ performances. Further to that, you will like to know their rate of growth. A new company that reports good trending QOQ performances is a indication of strong growth.
In another scenario, say after a recession, most markets will be slow. The best indications of a company coming out of a recession ahead of its peers is always to look at the QOQ financial performances.
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