What is a base year? How It’s Used in Analysis and Example
A base year is the first of a series of years in an economic or financial index. It is typically set to an arbitrary level of 100 in this context. New, up-to-date base years are periodically introduced to keep data current in a particular index. Base years are also used to measure the growth of a company. Any year can be a base year, but analysts typically choose recent years.
Understanding Base Year
A base year is used for comparison in the measure of business activity or economic or financial index. For example, to find the inflation rate between 2016 and 2021, 2016 is the base or first year in the time set. The base year can also describe the starting point from the growth point or a baseline for calculating same-store sales.
Many financial ratios are based on growth because analysts want to know how much a particular number changes from one period to the next.
The growth rate equation is (current year minus base year) / base year.
The past, in ratio analysis, is the base period.
Growth analysis is commonly used to describe company performance, particularly for sales. If Company A grows sales from $100,000 to $140,000, the company increases sales by 40%, where $100,000 represents the base-year value.
Investors can perform a base-year analysis of a company’s financial statements to determine whether or not its bottom line is growing consistently.
Base Year and Same-Store-Sales Calculations
Companies are always looking for ways to increase sales. One way that companies grow sales is by opening new stores or branches. New stores have higher growth rates because they start from zero, and each new store sale is incremental. As a result, analysts look at additional factors, such as how much sales grew on a same-store basis. This is also referred to as measuring comparable stores or comp store sales.
In the calculation of comp store sales, the base year represents the starting point for the number of stores and the amount of sales those stores generated. The store would have sold an average of $1,000 if Company A had 100 stores that sold a total of $100,000 last year. This is the base year. Following this method, the base year determines the base sales and number of stores.2
Let’s say that Company A opened 100 more stores in the following year, generating $50,000, but same-store sales declined in value by 10%, from $100,000 to $90,000. The company can report a 40% growth in sales from $100,000 to $140,000, but savvy analysts are more interested in the 10% decline in same-store sales.
How is a base year used?
Base years are used to compare or measure business activity or an economic or financial index. For example, a base year is used to calculate same-store sales. Base years are also used in calculating gross domestic product (GDP).
How is a base year chosen?
A base year is determined depending on the analysis being performed. For example, a company established in 2021 could use that year to measure sales growth.
How do you calculate the growth rate?
A growth rate can be calculated by dividing the difference between the ending and starting values for the period being analyzed and dividing that by the starting value. The growth rate formula is (current year minus base year) / base year. The base year represents the starting point from which to determine growth.
Base years are used in economic and financial indexes and to measure a company’s growth. The base year chosen depends on the analysis being conducted. When researching stocks, investors can conduct a base-year analysis to track a company’s growth, or lack thereof, to determine whether or not they should invest in it.
Conclusion
- A base year is the first of a series of years in an economic or financial index.
- Base years are also used to measure business activity, such as growth in sales from one period to the next.
- A base year can be chosen based on the analysis being performed.
