WHAT IS TREND ANALYSIS ???

• Trend analysis is a form of comparative analysis that is often employed to identify current and future movements of an investment or group of investments.

•  The process may involve comparing past and current financial ratios as they related to various institutions in order to project how long the current trend will continue. 

• The process of a trend analysis begins with identifying the category of the investments that are under consideration.

• After identifying past and present factors that are maintaining a current trend in performance, the investor can analyze each factor and project which factors are likely to continue exerting influence on the direction of the investment.

WHY TREND ANALYSIS ???

Trend analysis is important when examining a firm's financial statements, because financial analysts can see how company assets have grown over time.

In the competitive landscape, the topic of asset growth is often preeminent, especially in industries requiring substantial upfront investments -- such as oil and gas, mining and the military.

By evaluating performance trends, corporate analysts also can tell whether an organization is adeptly managing its money and investing it wisely. 

Advantages Of Trend Analysis :

Trend shows the direction (up or down ) of the changes.

Trends are easy to calculate and interpret .

It is a quick method of analysis

It is more accurate because it is based on percentages and not absolute figures.

Limitations Of Trend Analysis : The Trend may be different if different year is chosen as the base year . Further , the total number of years covered should not be too large (20 years ) or too small ( 2 years ).

The trend will give a distorted figure , or a wrong picture if the accounting policies in respect of depreciation, valuation of closing stock etc. have changed during the period under study .C

Constant Change in price level render accounting statement useless for Comparison .

How is trend analysis used to evaluate the financial health of an

organization?

Trend analysis evaluates an organization’s financial information over a period of time. Periods may be measured in months, quarters, or years, depending on the circumstances.

The goal is to calculate and analyze the amount change and percent change from one period to the next.

For example :In fiscal years 2010 and 2009, Coca-Cola had the operating income shown as follows :

2010( Amount )

2009 ( Amount)

Amount Change

Percent Change

Operating Income

$8,449

$ 8,231

???

???

Formula to find Amount Change :

Amount of change = Current year amount – Base year amount

Formula to find Percentage Change : Percentage Change : Amount Change / Base Year * 100

From the example we get ,

*Amount change = $ 8449 - $ 8231

Therefore , Amount Change = $ 218

* Percentage Change = $ 218 / $ 8231 * 100

Percentage Change = 2.64 %

2010( Amount )

2009 ( Amount)

Amount

Change

Percent Change

Operating Income

$8,449

$ 8,231

$218

$ 2.64 %

Trend analysis is often used to evaluate each line item on the income statement ...

let us see how is it analysed ..

Trend analysis is often used to evaluate each line item on the Balance sheet ...

How to Prepare Trend Analysis for Several years

???

Formula to Find Trend percentage for several years :

Trend percentage = Current year ÷ Base year

2010 2009 2008 2007 2006

Net sales $35,119 $30,990 $31,944 $28,857 $24,088 Percentage trend

146 %

129%

133%

120 %

100 %

Operating income

$  8,449 $  8,231 $  8,446 $  7,252 $  6,308

Percentage trend

134 % 130

% 134 %

115 %

100%