What is the difference between year over year and quarter over quarter?

Year over year sets a quarter against the same quarter twelve months earlier, so the season is the same on both sides. Quarter over quarter, also called sequential, sets it against the quarter just before. The sequential figure moves faster and catches turns sooner, and it also carries every seasonal swing in the business.

What is organic growth in an earnings release?

Organic growth is the increase a company produced from the businesses it already owned, leaving out revenue added by acquisitions and usually the effect of currency. Companies that buy other firms often report it next to headline growth, and the organic number is the better read of how the existing business is doing.

How to Compare Earnings Year Over Year, Quarter by Quarter

Q: How to Compare Earnings Year Over Year, Quarter by Quarter

Set the quarter against the same quarter a year earlier, then compare revenue, margins and EPS on both sides. Check the sequential change as a second view, strip out acquisitions, currency and any extra week, and read how management explains the difference.

Third-quarter revenue of $240,000,000 is 14.3% more than the same quarter last year. It is also 4% less than the quarter just before. Both figures are accurate, both will appear in somebody’s headline on the morning of the report, and which one you lead with decides whether the business looks like it is growing or shrinking, so the choice of comparison period comes before any other judgment about the quarter.

Which quarter do you compare against?

The same one, a year earlier. Year over year is the default for a simple reason: both sides share a season. A retailer’s holiday quarter, a heating company’s winter or a tax software firm’s spring all look huge next to the quarter before. Set them against last year’s version and the season cancels out.

Most earnings releases print the prior-year quarter right beside the current one. If yours doesn’t, the matching 10-Q from a year earlier has it. Check the fiscal calendar too, because a company whose year ends in January labels its quarters differently from one whose year ends in December.

How do you compare revenue, margins and EPS?

Start with revenue and work down the income statement.

Revenue up. Margin up a point. That is the good version.

The bad version is revenue up 14% with margin falling from 14% to 11%, which means the company bought its growth with discounts or higher costs, and the headline growth figure tells you nothing about it. Check EPS last, and check it with the share count beside it, since a buyback can lift earnings per share even when net income is flat.

That 6.7% is real money per share. It just didn’t come from the business.

Why look at the sequential change too?

Because year over year is slow. It compares against a quarter that ended a full year ago, and a business can turn in the months between.

Up 14.3% on the year, down 4% on the quarter. Is that a problem?

It depends on the season. If the third quarter is always softer than the second, the 4% dip is routine, and last year’s pattern will show it: look at what happened between the second and third quarters a year ago. If last year’s third quarter was higher than its second, the dip is new, and it is worth reading about. Seasonal businesses make the sequential figure noisy, which is exactly why year over year is the default, but in a business with no real seasonality, a sequential decline can be the first place a slowdown shows up.

What adjustments change the picture?

Deals, currency and the calendar all distort a year-over-year comparison.

Acquisitions add revenue that the company did not grow. Suppose $15,000,000 of the third quarter came from a business bought during the year. Take it out and revenue is $225,000,000, and growth against $210,000,000 drops to 7.1%. Half the headline growth was bought. Companies often report this as organic growth.

Currency moves the translated value of sales made abroad. A company with overseas revenue will often give a constant-currency growth rate, which restates this year at last year’s exchange rates. Read both.

Calendars shift. Many companies use a 52-week year and add a 53rd week every few years, so one quarter gets 14 weeks against 13, which is roughly a thirteenth more selling time, about 7.7%, and enough on its own to make a flat quarter look like strong growth to anyone reading only the headline. The release will say so, often in a footnote.

Does management’s explanation match the numbers?

Find the paragraph where the company explains the quarter, in the release or in the management discussion section of the 10-Q. Then test it against your own figures. If management credits pricing, margins should be up. If it credits volume, revenue should be up with margins roughly flat. An explanation that doesn’t fit the numbers you just worked out is worth noting, and so is a quarter where earnings estimate revisions move the next day in a direction the explanation didn’t prepare you for.

To practice sorting what mattered in a report from what didn’t, try the quiz on what mattered in that quarter. The lesson on what an earnings release reports goes line by line through the statement you just compared, and the earnings hub collects the rest.