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.
-
Stock Analysis
Stock analysis is the evaluation of a particular trading instrument, ... -
Horizontal Analysis
A procedure in fundamental analysis in which an analyst compares ... -
Trend Analysis
An aspect of technical analysis that tries to predict the future ... -
Vertical Analysis
A method of financial statement analysis in which each entry ... -
Financial Statement Analysis
The process of reviewing and evaluating a company's financial ... -
Fundamental Analysis
A method of evaluating a security that entails attempting to ...
-
TradingBasics 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. -
InvestingFundamental Analysis for Traders
Find out how the fundamental analysis method can be applied strategically to increase profits. -
InvestingRatio Analysis Tutorial
If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios. -
TradingThe Fundamentals Of Forex Fundamentals
Charting is not the only way to analyze the foreign-exchange market. Learn how to apply fundamental analysis to the economic indicators. -
InvestingIntroduction To Fundamental Analysis
Learn this easy-to-understand technique of analyzing a company's financial statements and reports. -
InvestingThe Importance Of Analyzing Accounts Receivable
While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
-
What is the best method of analysis for forex trading?
Types Of Analysis Used In ForexForex analysis is used by the retail forex day trader to determine whether to buy or sell ... Read Answer >> -
What variables are most important when making a prediction through sensitivity analysis?
Explore sensitivity analysis and how this method considers different variables to determine a course of action based on statistical ... Read Answer >> -
How do stock dividends affect the retained earnings account?
Understand the difference between financial ratio analysis and accounting ratio analysis. Learn why ratio analysis is important ... Read Answer >> -
Why would you look at year-over-year rather than quarterly growth?
Find out why year-over-year growth analysis is more common than quarterly growth analysis in stock valuation and why investors ... Read Answer >>