Quarter on Quarter (QoQ) - FinLib (2024)

The Quarter on Quarter refers to the comparison of numbers between two consecutive quarters. It is mostly used as an analysis tool in finance where the growth of any parameter has to be measured over the previous quarters.

For example, if we are comparing the financials of a company in Quarter 3 with the financials in Quarter 2 of the same year, then we can say that we are measuring the growth on a Quarter-on-Quarter basis.

On the other hand, if we had compared the financials in Quarter 3 of this year with the financials in Quarter 3 from last year, then we measure the quarterly financials on a Year on Year basis. The same concept can also be applied to any set of numbers to measure the change. The Quarter on Quarter is also known as Quarter over Quarter, or simply QoQ.

We only need basic mathematics to measure the growth on a Quarter on Quarter basis. The value from the current quarter can be called the Present Value, and the numbers from the previous quarter can be called the Past Value.

The difference between the present and past values can be used to get the Change in the value. Of course, this Change could be a positive or a negative number. On dividing the Change by the Past Value, we can get the QoQ growth in percentage terms.

\(Growth=\frac{(Present Value−Past Value)}{Past Value}\)

As it can be seen, the above growth formula is very generic and easy to calculate. The Quarter-on-Quarter measurement is different from the Year to Date (YTD) concept. This is because the QoQ is measured for consecutive quarters, whereas the YTD is measured for a time period between the current date and the start of the year.

Suppose that the sales of a company in Quarter 4 of this year is INR 6 crore (INR 6,00,00,000) and the sales in Quarter 3 of this year was INR 5 crore (INR 5,00,00,000). To measure the Quarter on Quarter growth, we first need to measure the difference in sales of both the quarters.
This difference will be INR 6 crore – INR 5 crore = INR 1 crore and the growth rate will be:

\(QoQ growth=\frac{1}{5}×100=20\%\)

If we were measuring the Year on Year growth, then we would have compared the Quarter 4 results of this year with the Quarter 4 results of the previous year.

The quarterly performance of companies can be analyzed by using the QoQ in share market. Comparing the present quarter with the preceding quarter can give a good measurement of the relative growth of a company. In addition, the QoQ growth is also regularly tracked for large economic indicators in the country.

But the comparison can only be made if the financials are not impacted by cyclical or seasonal factors. If the values in the data swing wildly every quarter, then it can be difficult to draw conclusions and make forecasts for the future.

So, there is a limitation because some parameters can be judged on a quarterly basis, whereas the quarterly comparison of other parameters might lead to incorrect analysis.

A major problem with the Quarter over Quarter growth is that the calculations could get biased in seasonal industries. For example, a hotel might have 100 % occupancy during the peak tourist season and during the off-season, the occupancy might just be 40 %, for example.

In such a case, it would not be practical to compare the financials of a quarter with the just preceding quarter. This is because there could be a sudden jump or drop in the financials and this could lead to an incorrect interpretation.

To overcome this limitation, the first step is to be aware about such biases in the data. After that, the Q-o-Q growth could be measured along with the Year on Year (YoY) growth across the years. The YoY concept ensures that the comparison is made between similar time periods. For example, between Quarter 1 of this year and Quarter 1 of previous year.

Another problem with the Quarter over Quarter growth is that the calculations could get biased due to the Base Effect. This means that if the value in the base quarter (Past Value) is impacted due to some reason, then the Quarter-on-Quarter growth calculation could generate weird values.

Example: Suppose that a company had the following Profit After Tax (PAT) for the recent 3 quarters:
INR 25 crore in quarter 1
INR 10 crore in quarter 2
INR 20 crore in quarter 3

The QoQ growth in quarter 2 is (10 – 25) / 25 = – 0.6 or -60 %, and the growth in Year 3 is (20 – 10) / 10 = 1 or 100 %. If we are currently in quarter 3 and we are analyzing the business performance, then the Quarter-over-Quarter comparison might indicate that the PAT has grown at an amazing rate of 100 %.

However, a closer look at the numbers will reveal that the PAT in quarter 3 (INR 20 crore) is still lower than the PAT in quarter 1 (INR 25 crore). So, over the three quarters, the PAT has actually decreased.