What Is a Base Year?
A base year is the first of a series of years in an economic or financial index. In this context, it is typically set to an arbitrary level of 100. 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 serve as a base year, but analysts typically choose recent years.
- 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 any year and is chosen based on the analysis being performed.
Understanding Base Year
A base year is used for comparison in the measure of a business activity or economic or financial index. For example, to find the rate of inflation between 2016 and 2021, 2016 is the base year or the first year in the time set. The base year can also describe the starting point from a point of growth 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 - Base Year) / Base Year.
The past, in ratio analysis, is the base period.
Growth analysis is a commonly used way to describe company performance, particularly for sales. If company A grows sales from $100,000 to $140,000, this implies that the company increased 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 are starting from zero, and each new store sale is an incremental sale. As a result, analysts look at additional factors such as how much sales grew on a same-store sales 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. For instance, if company A has 100 stores that sold a total of $100,000 last year, each store sold an average of $10,000. This is the base year. Following this method, the base year determines the base sales and the base number of stores.
Let's say that company A opens 100 more stores in the following year and these stores generate $50,000, but same-store sales decline in value by 10%, from $100,000 to $90,000. The company can report 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 in the calculation of 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 moving forward.
How Do You Calculate Growth Rate?
A growth rate can be calculated by dividing the difference between the ending and starting values for the time period being analyzed and dividing that by the starting value. The growth rate formula is (Current Year - Base Year) / Base Year. The base year represents the starting point from which to determine growth.
The Bottom Line
Base years are used in economic and financial indexes as well as to measure the growth of a company. 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 of, as part of research to determine whether or not they should invest in it.