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Seasonality: Why Comparing Q4 to Q3 Can Be Misleading

Reading Financial Statements • Beginner Investing • 6 min

What this lesson is about

Some businesses are naturally lumpy through the year. Comparing the wrong quarters to each other can make a perfectly normal pattern look like a real trend.

2 parts · a quick check after each · then the quiz

Part 1 of 2

Many businesses don’t make money evenly throughout the year. If you treat a naturally uneven business like it should have similar results each quarter, you might draw the wrong conclusions from a normal pattern. Retailers show this clearly. Holiday shopping brings in a large part of their annual sales in the fourth quarter (October through December). This means Q4 revenue will almost always be higher than Q3 revenue each year, simply because of the calendar. It’s not that the business suddenly improves in October.

This is why comparing a seasonal company’s results quarter to quarter can be misleading. Instead, look year-over-year (this quarter versus the same quarter last year). This way, you account for the seasonal pattern and see if the business is actually growing, shrinking, or staying the same, instead of just reflecting calendar changes.

SeasonalityOnly the year-on-year number is growth. The other is mostly the season.

Quick check

What does "seasonality" mean in the context of a company's financial statements?

Part 2 of 2

Insider Angle: Retail isn’t the only seasonal industry. Travel and hospitality see demand change with vacation seasons and weather. Agricultural businesses follow planting and harvest cycles. Even some software or service companies have patterns tied to corporate budgets, like a rush of purchases before a customer’s fiscal year-end. The key takeaway is the same across these industries: before reacting to a jump or drop from one quarter to the next, check if the business is seasonal. If it is, focus on the year-over-year comparison before making any conclusions.
Try This: Choose a retailer and gather its last 8 quarters of revenue. List or plot these numbers. Notice the recurring Q4 pattern. Then compare each Q4 to the prior year’s Q4, not Q3, to uncover the real year-over-year trend.

Quick check

Why do many retailers report noticeably higher revenue in Q4 (October-December) than in Q3, essentially every single year?

Quiz

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