Quarter and year: why the comparison has to be like for like
intermediate
Automated material · TradeAlmanac editorial deskPrepared by a language model from our stored data and checked by an editor.
A company reports quarterly, and the first instinct is to compare the latest quarter with the previous one. For many industries that is a mistake.
Seasonality
Retail earns more in the run-up to holidays. Utilities earn in the heating season. Agriculture follows the harvest.
Comparing the fourth quarter with the third at such a company shows growth that is not there: it would appear in a bad year too.
The correct comparison
The quarter against the same quarter a year earlier. The seasonal effect is identical in both and therefore cancels.
Or trailing twelve months — the sum of the last four quarters. That measure removes seasonality entirely and refreshes every quarter.
The base effect
Growth against a collapsed quarter a year ago looks impressive and means only a return to normal. Look at the absolute level, not only at the rate of change.
One-off items
An asset sale, a write-off, a fine, a currency revaluation — all land in a single quarter and distort the comparison. It helps to strip them out by hand to see the operating trend.
What follows
A single quarter is almost never a reason to act. Related: How to read the income statement and Earnings per share: the metric easiest to improve without improving the business.
Prepared by a language model from our stored data and checked by an editor.
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