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What Is a Base Year?
A base year marks the starting point for tracking data over time. It is the reference point for measuring change in the data.
Base years are used to measure business activity, such as growth (or contraction) in sales from one period to the next. Base years also mark the starting point for an economic or financial index. Base years may be revised periodically so that the numbers reflect relatively recent and more relevant activity.
Key Takeaways
- A base year serves as the starting point for tracking numbers over time.
- Base years are used in financial analysis to track growth in sales, revenue growth, and other metrics.
- A base year is selected for its relevance to the analysis being performed.
Understanding Base Years
A base year is used for comparison in the measurement of business activity or economic or financial indexes. For example, to find the rate of inflation between 2016 and 2024, 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.
Fast Fact
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 Horizontal Analysis
Horizontal analysis involves comparing financial data across multiple periods to track changes and trends over time. The base year serves as the reference point or anchor for these comparisons, providing a benchmark against which current and future financial data are measured.
When performing year-over-year horizontal analysis, the base year’s financial figures are used to calculate the percentage change in key metrics such as revenue, net income, or expenses for subsequent years. For example, if the base year is 2022, and a company’s revenue was $1 million that year, then the revenue figures for 2023 and beyond are compared against this base year to determine growth or decline. Horizontal analysis is fairly straightforward, especially for public companies that have to make these year-over-year financial numbers public each quarter.
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. The store sold an average of $1,000 if Company A has 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 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 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.
Base Year and Real Estate Leasing
The concept of a base year can also be found in real estate. In commercial real estate, the base year is used to determine the tenant’s responsibility for certain operating expenses over the term of the lease. The base year typically refers to the first full year of the lease. The expenses in this period can then be used as a benchmark or baseline for calculating any future increases that the tenant may be responsible for paying.
For example, if the base year of a lease is set as 2024, and the operating expenses for that year are $100,000, the tenant would be responsible for their share of any costs exceeding $100,000 in subsequent years. If the expenses rise to $110,000 in 2025, the tenant would pay their portion of the $10,000 increase.
Another aspect of a base year relates to leasing and rent escalation. A long-term lease agreement in the commercial industry might entail a 10-year lease with a 4% escalation each year. If the rent of the base year is $1 million per year, subsequent years of rent would be 4% higher than the year prior (cascading back to the base year of $1 million). The first year after the base year’s rent would be $1.04 million.
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 period being analyzed and dividing that figure 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.
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