Financial Management and Business Data Analytics · Comparative, Common-Size Financial Statements and Trend Analysis

Trend Analysis and Index Numbers: Base Year Method

Updated 10 October 2026 · Fact-checked

Trend analysis shows how a financial item changes over several years. Pick one year as the base and set it at 100. Then divide each year's figure by the base-year figure and multiply by 100. The result is a trend percentage (index number). Read each series separately and compare them.

Understand Trend Analysis and Index Numbers

Comparing just two years tells you little. A company's sales may rise in one year and fall in the next. Trend analysis looks at a run of years, usually five or more, to show the direction and speed of change.

To make figures comparable, you choose one year as the base year and give it the value 100. Every other year is expressed as a percentage of the base year. These percentages are called trend percentages or index numbers. A value of 140 means the item is 40% higher than in the base year. A value of 85 means it is 15% lower.

The base year is normally the earliest year in the data. It should be a normal year. If the base year had unusually high or low figures, every trend percentage will be distorted.

The real value comes from comparing trends of related items. If sales have an index of 150 but net profit has an index of 110, profit is not keeping pace with sales, so costs are rising faster. If receivables have an index of 200 while sales are at 130, credit control may be weakening.

Trend percentages show direction and relative change only. They do not show the actual size of an item. Use them together with absolute figures, ratios and common-size statements.

Key rules to remember

Trend percentage (index number): Trend % = (Item value in the given year ÷ Item value in the base year) × 100; The base year always works out to 100. Use the same base year for every item.
Percentage change from the base year: Change % = Trend % − 100; A positive result means an increase over the base year. A negative result means a decrease.
Year-on-year change (for comparison): Change % = (Current year − Previous year) ÷ Previous year × 100; This uses the previous year, not the base year. Do not mix it up with trend percentages.
Rebasing to a new year: New index = (Old index of the year ÷ Old index of the new base year) × 100; Use this when the base year is changed and the original figures are not given.

How to solve Trend Analysis and Index Numbers questions

Use this method for any trend analysis question, whether it asks for calculation, interpretation or both.

1Read the question and note the base year. If none is given, take the earliest year as the base.
2List each item (sales, cost of goods sold, profit, receivables and so on) in rows and the years in columns.
3Write 100 for the base year against every item.
4For each later year, divide the item's figure by its base-year figure and multiply by 100. Round as the question asks, usually to one or two decimals.
5Check your work: every base-year cell must be 100, and if an item's rupee figure rose from the previous year, its index must also rise from the previous year's index.
6Compare related items. Compare sales with profit, sales with receivables, and sales with expenses.
7Write a short conclusion for each item: direction, size of change and what it may mean for the business.
8Add a note that the trends are based on the stated base year and should be read with absolute figures and ratios.

Quickest way: Constant-multiplier shortcut

When to use it: Use this when you must calculate many trend percentages quickly from a table of rupee figures.

For each item, compute 100 ÷ base-year figure once. This is your multiplier.
Multiply each year's figure by that multiplier to get the index.
Round only at the end, not at the multiplier stage, if your calculator allows it. Otherwise keep four decimals.
Check one figure by the long method to catch slips.
Write the conclusion in one line per item, using words such as rose faster than, lagged behind, or stayed flat.

Common mistakes in Trend Analysis and Index Numbers

Dividing by the previous year instead of the base year
Students confuse trend percentages with year-on-year growth rates.
Fix: Always keep the base-year figure as the fixed denominator for the whole row.
Not setting the base year at 100
Students leave the base column blank or show the rupee figure.
Fix: Write 100 for the base year against every item, including ones you think are obvious.
Reading an index of 120 as a 120% increase
The index is read as the change rather than the level.
Fix: Subtract 100. An index of 120 means a 20% increase over the base year.
Using different base years for different items
Data may be missing for an item in the first year, so the student shifts the base for that row.
Fix: Use one common base year for all items so that they can be compared. If data is missing, say so in the answer.
Interpreting profit trends without looking at sales trends
Students comment on each row alone.
Fix: Compare related rows. Say whether profit grew faster or slower than sales and what that implies for costs.
Ignoring inflation and an abnormal base year
The numbers are taken at face value.
Fix: Mention that rupee figures are not adjusted for price changes and that an unusual base year distorts all indices.

Worked examples

Example 1

The sales, cost of goods sold and net profit of Kaveri Traders for four years are given. Taking 2022-23 as the base year, calculate trend percentages.

Year: 2022-23, 2023-24, 2024-25, 2025-26
Sales (₹ lakh): 200, 230, 260, 300
Cost of goods sold (₹ lakh): 120, 144, 168, 204
Net profit (₹ lakh): 20, 22, 21, 24

Show the solution

Base year 2022-23 is 100 for all items.
Sales: 230 ÷ 200 × 100 = 115; 260 ÷ 200 × 100 = 130; 300 ÷ 200 × 100 = 150.
Cost of goods sold: 144 ÷ 120 × 100 = 120; 168 ÷ 120 × 100 = 140; 204 ÷ 120 × 100 = 170.
Net profit: 22 ÷ 20 × 100 = 110; 21 ÷ 20 × 100 = 105; 24 ÷ 20 × 100 = 120.
Interpretation: sales are up 50% over the base year, but cost of goods sold is up 70%, so costs are rising faster than sales. Net profit is up only 20%, so margins are under pressure. Profit also dipped in 2024-25 even though sales grew.

Answer: Trend percentages for 2022-23 to 2025-26: Sales 100, 115, 130, 150; Cost of goods sold 100, 120, 140, 170; Net profit 100, 110, 105, 120. Costs are growing faster than sales, so profitability is weakening.

Example 2

Using 2023-24 as base year, find the trend percentages for Aarav Ltd and comment.

Year: 2023-24, 2024-25, 2025-26
Sales (₹ crore): 80, 100, 120
Trade receivables (₹ crore): 10, 15, 24

Show the solution

Base year 2023-24 is 100 for both items.
Sales: 100 ÷ 80 × 100 = 125; 120 ÷ 80 × 100 = 150.
Trade receivables: 15 ÷ 10 × 100 = 150; 24 ÷ 10 × 100 = 240.
Comparison: in 2025-26 sales are 50% above the base year, but receivables are 140% above it.
Comment: receivables are growing much faster than sales. This suggests longer credit periods or slower collections, which may strain working capital and increase the risk of bad debts. The credit policy should be reviewed.

Answer: Sales index: 100, 125, 150. Receivables index: 100, 150, 240. Receivables are growing far faster than sales, which signals weak credit control.

Exam tips

Draw a clean table with items in rows, years in columns and 100 in the base column. Presentation earns step marks.
Always write a short interpretation. Many 14-mark questions give marks for comments, not just calculations.
For MCQs, check whether the question asks for the index or the percentage change. Subtract 100 for change.
State the base year clearly at the top of your answer. If the question does not give one, say that you have taken the earliest year.
Write one line on limitations if the question asks for a critical view: base-year distortion, no price adjustment, and no absolute size.

Practice questions from Comparative, Common-Size Financial Statements and Trend Analysis

Trend Analysis and Index Numbers: frequently asked questions

What is the trend analysis formula?

Trend percentage = (Figure of the given year ÷ Figure of the base year) × 100. The base year is set at 100. Apply the same base year to every item you want to compare.

Which year should be taken as the base year?

Take the year stated in the question. If none is stated, use the earliest year. It should ideally be a normal year, as an unusual base year distorts all the percentages.

What are the limitations of trend analysis?

It depends on the base year chosen and can mislead if that year was abnormal. It ignores inflation and changes in accounting policies. It shows relative change, not actual amounts, so use it along with ratios and absolute figures.

How is trend analysis different from year-on-year growth?

Trend analysis divides every year by one fixed base year. Year-on-year growth divides each year by the year before it. The two give different numbers, so read the question carefully.