Question

Can you distinguish between absolute changes and percentage changes in the financial statement numbers? Which is a better measure of change? How do you tell?

Answer 1

Absolute change refers to the simple difference in the indicator over two periods in time Absolute change = value of indicator in period 2 - value of indicator in period 1 , i.e. Percentage change expresses the absolute change as a percentage of the value of the indicator in the earlier period Percentage change = (value of indicator in period 2 - value of indicator in period 1)/Value of indicator in period 1 Percentage changes is better measure of changes sometimes it's because the two things have different masses to begin with and so it's much more reliable therefore to give the change as a % change of what it was therefore allowing for better comparisons. so % change will show you the size of the change relative to it's original mass. Here is a simple example: 2 people lose weight. Person A started at 160lbs and went to 140lbs. Person B started at 130lbs and went to 110lbs. If you are just comparing the differences in mass then they both lost 20lbs so it looks the same. however when you use the % change you can see that the %change for person A is 160-140/160×100 = 12.5% The %change person B is 130-110/130×100 = 15.4%. comparing these you can see that person B has lost a greater % of their body weight than person A and so while they both lost 20lbs, you must use %change to find out how great a loss this was relative to their starting weight.