Why do other people have doubts about the quarter-on-quarter analysis?

233 0

What is quarter-on-quarter?

People would always be curious whether a company made improvements and growth or not. It is pretty natural, especially for investors and analysts. There is a way to compare and calculate the current and the previous fiscal quarter changes, and we call it the QOQ. It stands for quarter-on-quarter.

A business that wants to know whether they are meeting the goals they set for a year based on a shorter term can look at the QOQ. It holds essential information about how the company has faired so far. Regardless of whether it is a good or bad result, they need to know it to respond accordingly.

QOQ is a measure that compares the earnings succeeding quarters of the same year. Let us say that Company A’s Q1 earnings is trading at $2.00 per share, and it is $2.050 for Q2. Here we see a QOQ growth between the two quarters. It is an attractive figure to investors because there was an improvement.

Quarter on quarter in the financial world

We know that a new year starts with January and ends with December generally. Companies have their version of a year that they fiscal or financial year. While they can always begin theirs with January, they can choose another month. It all depends on their strategy. It depends on the products or services they offer since these have peak and low seasons.

Since we are talking about quarters relative to financial and accounting principles, we might elaborate more. A quarter refers to three consecutive months within a year. Hence, if a year has 12 months, it makes sense that there are four quarters. The most typical Q1 is January to March. However, this all depends on the company, as we have mentioned earlier. The following months are called Q2, Q3, Q4.

Let us assume that the company made January to March their Q1; then their Q2 will be April to June. We can make a QOQ analysis if we compare their financials on these two quarters. They can also do this with Q2 and Q3 or Q3 and Q4.

If there is a QOQ, there is also a YOY.

What is a YOY? It stands for year-on-year. While it has similarities with QOQ, YOY is a different measure. It compares this year’s quarter to the same quarter of the previous year. For example, it is a comparison between 2021’s Q1 and 2020’s Q1. Many people will argue that comparing quarters based on YOY is better than a QOQ because it gives a broader view of the company’s performance. It also does not show the impact of small and isolated issues.

Why do other people have doubts about the QOQ analysis?

With what we have mentioned earlier, you may already know why people have doubts about the QOQ analysis. It does not show us the bigger picture. There are sales that may show on the analysis that does not happen regularly. We call them seasonal variance. For example, a QOQ analysis may show a downward or an upward trend that does not reflect what happens regularly. Hence, others would always prefer YOY any day because it shows an analysis of the same quarter from a year to another. There is no need to adjust seasonal situations to provide accurate data.

Related Post