What is 'Base-Year Analysis'

A base-year analysis includes all layers of analysis concerning economic trends in relation to a specific base year. For example, a base-year analysis could express economic variables relative to base-year prices to eliminate the effects of inflation.

When analyzing a company's financial statements, it is useful to compare current data with that of a previous year or base year. A base-year analysis allows for comparison between current performance and historical performance. With historical context, a business analyst can spot trends helpful when allocating resources to areas requiring additional help or areas experiencing growth.

BREAKING DOWN 'Base-Year Analysis'

Often, a base-year analysis is used when expressing gross domestic product and is known as real GDP when referred to in this way. By eliminating inflation, the trend of economic growth is more accurate, as price level changes are accounted for.

A simple formula would look like: $$ (Base Year) = $$ (Chosen Year) x Price Index (Base Year) / Price Index (Chosen Year)

Why a Base-Year Analysis Matters

A base-year analysis of a company's financial statements is important when determining whether a company is growing or shrinking. If, for example, a company is profitable every year, the fact that its revenues are shrinking year-over-year may go unnoticed. By comparing revenues and profits to those of a previous year, a more detailed picture emerges.

When performing a base-year analysis of any variety, it's important to adjust an analysis for any regime changes. Common regime changes include a range of macro, micro and industry related factors. For example, changes in accounting methods, the tax code, political party control, demographics and social and cultural shifts.

The financial crisis of 2009-2010 is a good example where a base-year analysis that is not adjusted for a regime change is problematic. For instance, in response to sharp declines in housing values, many banks in the U.S. accept government lifelines, as well as changes in accounting methods (Ie. the suspension of market-to-market accounting). An analysis using 2009 as a base-year is going to be overwhelmed by the significant market disruption experienced during that time.

There is no universally accepted "base-year," every analysis will include a different base based on the particulars under review.

RELATED TERMS
  1. Real Gross Domestic Product (GDP)

    Real gross domestic product is an inflation-adjusted measure ...
  2. Marginal Analysis

    Marginal analysis is an examination of the additional benefits ...
  3. Quantitative Analysis (QA)

    Quantitative analysis (QA) is a technique that seeks to understand ...
  4. Time Series

    A time series is a sequence of numerical data points in successive ...
  5. Risk Analysis

    Risk analysis is the process of assessing the likelihood of an ...
  6. Decision Analysis - DA

    Decision analysis is a systematic, quantitative and visual approach ...
Related Articles
  1. Trading

    Basics Of Technical Analysis

    Learn how chartists analyze the price movements of the market. We'll introduce you to the most important concepts in this approach.
  2. Investing

    Fundamental Analysis for Traders

    Find out how the fundamental analysis method can be applied strategically to increase profits.
  3. Investing

    Understanding Fundamental Vs. Technical Analysis

    The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental and technical analysis. Learn the core differences in these strategies and ...
  4. Investing

    12 things you need to know about financial statements

    Before investing, discover 12 characteristics of financial statements that can help you evaluate companies and increase your chances of choosing a winner.
  5. Investing

    Peer Comparison Uncovers Undervalued Stocks

    Learn how to put one of the top equity analysis tools to work for you.
  6. Investing

    Scenario Analysis Provides Glimpse Of Portfolio Potential

    This statistical method estimates how far a stock might fall in a worst-case scenario.
RELATED FAQS
  1. What is the best method of analysis for forex trading?

    Learn more about the types of forex analysis used by currency traders such as charting tools, economic indicators and/or ... Read Answer >>
  2. Why should an investor understand accounting?

    Learn why an investor should understand business accounting to perform investment and credit analysis. Find out about asset ... Read Answer >>
  3. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  4. How do I take qualitative factors into consideration when using fundamental analysis?

    Fundamental analysis is the method of analyzing companies based on factors that affect their intrinsic value. Find out how ... Read Answer >>
Trading Center