A shopkeeper in Chennai sells far more sweets in the October-December quarter than in the April-June quarter. Nobody would call that growth. It is the calendar. The same problem appears whenever companies report growth, and the two standard measures, YoY and QoQ, exist to deal with it.
The definitions
- YoY (year-on-year) compares a period with the same period a year earlier.
- QoQ (quarter-on-quarter) compares a quarter with the one immediately before it.
The formula is the same for both: (new − old) ÷ old × 100.
A seasonal example
Take a fictional umbrella maker, Monsoon Mart. Quarterly revenue in ₹ crore:
- Q1 (Apr-Jun): 90
- Q2 (Jul-Sep): 150
- Q3 (Oct-Dec): 60
- Q4 (Jan-Mar): 40
QoQ growth in Q2 is (150 − 90) ÷ 90 = 66.7%. Impressive, until you see that Q3 is a fall of 60%. The pattern repeats every year. Now suppose last year’s Q2 was ₹140 crore. YoY growth is (150 − 140) ÷ 140 = 7.1%. That is the figure that says whether the business actually grew.
When QoQ is useful
QoQ is not wrong. For businesses without strong seasons, or when you want to see a recent change of direction, it shows momentum faster than YoY. A company whose YoY growth is 12% but whose last three QoQ figures are falling is telling you something YoY alone hides. The sensible habit is to look at both and know which question each answers.
Three traps
- Mixing the two in a headline. “Profit up 25%” could mean either. Check which comparison is meant.
- One-off quarters. If last year’s quarter had an unusual item, YoY exaggerates or hides change. Look at the notes.
- Small bases. A rise from ₹2 crore to ₹6 crore is 200% and may not mean much in the context of the whole business.
A short rule
Use YoY as the default for any business with seasons, and QoQ to read recent direction. Say which one you used. And compute growth on the same basis every time: standalone with standalone, consolidated with consolidated. To check the arithmetic, a YoY and QoQ growth calculator shows its working.
A common mix-up in the news
Many headlines say “profit up 20%” without saying which comparison they use. If a quarter’s profit rose 20% on the previous quarter, but is flat on the same quarter last year, the first statement is true and the second tells you the business has not really grown. Before you repeat a growth figure to anyone else, add the comparison to it. If the source does not say, calculate it yourself from the filing, which takes less than a minute.
A table you can reproduce
Return to Monsoon Mart and add last year’s figures, in ₹ crore.
- Last year: Q1 82, Q2 140, Q3 55, Q4 38.
- This year: Q1 90, Q2 150, Q3 60, Q4 40.
YoY growth by quarter: Q1 9.8%, Q2 7.1%, Q3 9.1%, Q4 5.3%. This shows a steady business growing at between 5% and 10%. The QoQ numbers, in contrast, swing between +66.7% and −60%, which describe the umbrella season and not the business. The same company, two sets of percentages, and only one is informative about growth.
Annualising a quarter: a warning
Some reports annualise QoQ growth, for example by saying a 3% quarterly rise is “12% annualised”. The correct compounding is 1.03⁴ − 1 = 12.6%, so 12% is only roughly right, but the larger issue is that annualising assumes the same growth every quarter, which seasonal businesses do not deliver. Treat annualised quarterly growth as an arithmetical translation, not a prediction.
Trailing twelve months
Another way to smooth seasonality is to add up the last four quarters, called the trailing twelve months (TTM). Compare this TTM with the TTM a year earlier. It removes the seasonal pattern because every TTM contains one of each quarter. It reacts more slowly than a single quarter, which is the price of its stability.
Which to use when
- Seasonal business, asking “is it growing?”: YoY.
- Non-seasonal business, asking “has the trend changed recently?”: QoQ, alongside YoY.
- Smoothing out several odd quarters: TTM or a multi-year CAGR.
- Anything with a recent acquisition or disposal: check whether figures are comparable, as the mix of the business has changed.
Writing about growth
Whenever you write a growth figure, attach the comparison: “up 7.1% year on year” or “down 4.2% from the previous quarter”. It takes four extra words and removes a whole category of confusion. If you are reading, apply the reverse rule: any growth figure that does not say what it is compared with is incomplete, and it is worth finding out which comparison was used before drawing conclusions from it.
For a longer explanation with more examples, including why the same quarter last year is the usual comparison for companies and how analysts handle odd quarters, see why the same quarter last year is the usual comparison.
Growth rates are easy to calculate and easy to misread. The calculation takes seconds; choosing the right comparison is the real skill.