The dollar amount of change from year to year is significant, and expressing the change in percentage terms adds perspective. The dollar amount of any change is the difference between the amount for a comparison year and the amount for a base year. The percentage change is computed by dividing the amount of the dollar change between years by the amount for the base year. This is illustrated in the following tabulation:
|
Increase or (Decrease) |
||||||||
|
In Thousands |
2006 over 2005 |
2005 over 2004 |
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|
|
Year 2006 |
Year 2005 |
Year 2004 |
Amount |
% |
Amount |
% |
|
|
Net sales |
600 |
500 |
400 |
100 |
20% |
100 |
25% |
|
|
Net income |
36 |
40 |
50 |
(4) |
(10) |
(10) |
(20) |
|
Although net sales increased $100,000 in both 2005 and 2006, the percentage change differs because of the change in the base from 2004 to 2005. These calculations present no problems when the figures for the base year are positive amounts. If a negative amount or a zero amount appears in the base year, however, a percentage change cannot be computed.
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If a company is experiencing growth in its economic activities, sales and earnings should increase at more than the rate of inflation.
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Percentage changes may create a misleading when the dollar amount used as a base is unusually small.
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