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 periodi𒁏cally 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.

Understanding Base Year

A base year is used for comparison in the measure of business activity or economic or financial index. 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 澳洲幸运5官方开奖结果体彩网:same-store sales.

Many financial ratios are based on growth 🐻because analysts want to know how much a particular number changes from one perio💞d to the next.

The 澳洲幸运5官方开奖结果体彩网:growth rate equation is ꦿ(Current Year - Base Yea🥃r) / Base Year.

The past, in ratio analysis, is the base period.

Growth analysis is a commonly used way to describe company performance, particularly for ꦡsales. 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.

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 comp𒈔anies that have to public these year-over-year financial numbers 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 澳洲幸运5官方开奖结果体彩网:comparable stores or 澳洲幸运5官方开奖结果体彩网:comp store sales.

In the calculation of comp store sales, the base year represen🦋ts 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 baseꦯ 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 澳洲幸运5官方开奖结果体彩网:real estate. In commercial real estate, the base year is used to determine the tenant’s resp🍰onsibility for certain operating expenses over the term of the lease. The base year typically refers to the fi✱rst 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 thei𝓡r 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 is leasing relates to 澳洲幸运5官方开奖结果体彩网:rent escalation. A long-term lease agreement in the commercial industr🐻y 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.

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.