What is a 'Base Year'
A base year is the first of a series of years in an economic or financial index. A base year in an index is normally set to an arbitrary level of 100. New, up-to-date base years are periodically introduced to keep data current in a particular index. Any year can serve as a base year, but analysts typically choose recent years.
BREAKING DOWN 'Base Year'A base year is the year used for comparison in the measure of a business activity or economic index. For example, to find the rate of inflation between 2005 and 2010, make the calculations using 2005 as the base year, or the first year in the time set. Base year can also describe the starting point from a point of growth, or a baseline for calculating same-store sales.
Base Year and Growth Rates
Many financial ratios are based on growth, as analysts want to know how much a particular number changes from one time period to the next. The growth rate equation is: (Current Year - Base Year) / Base Year. The past, in ratio analysis, is the base time period. Growth analysis is a commonly used way to describe company performance, especially for sales. If company A grows sales from $100,000 to $140,000, it means the company increased sales by 40%, where $100,000 represents the base year value.
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 are starting from zero, and each new store sale is an incremental sale. As a result, analysts like to know more than just sales; they want to know how much sales grew on a same-store sales basis. This is also referred to as 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. For instance, if company A has 100 stores that sold $100,000 last year, it means that each store sold $10,000. This is the base year. In this way, the base year determines the base sales and the base number of stores. Now company A opens 100 more stores in the following year. These stores generate $50,000, but same-store sales decline 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.