Low base effect in business and economics is the tendency of a small absolute change from a low initial amount to be translated into a large percentage change.[1][2]
In the following example, focusing solely on the 33.3% growth of Company B in year 5 may give a misleading indication of the company's relative performance versus Company A.
| Initial | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Company A Value | 100 | 120 | 140 | 160 | 180 | 200 |
| Change | – | 20 | 20 | 20 | 20 | 20 |
| %Growth | – | 20 | 16.7 | 14.3 | 12.5 | 11.1 |
| Company B Value | 100 | 90 | 80 | 70 | 60 | 80 |
| Change | – | -10 | -10 | -10 | -10 | 20 |
| %Growth | – | -10 | -11.1 | -12.5 | -14.3 | 33.3 |
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References
- ^ Vaughan, Mark D. and Dusan Stojanovic. (July 1996). Loan Quality In The Eighth District: Worth A Closer Look. Retrieved 2010-11-07.
- ^ Parikh, Parag. (2009). Value Investing And Behavioral Finance. New Delhi: Tata McGraw-Hill. p. 120. ISBN 978-0-07-007763-8.
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This page was last edited on 17 November 2021, at 13:12