Trend analysis is the process of analyzing the financial statements by the computing trend of a series of information using certain techniques.
With the help of the trend analysis tool, we determine the directions upward or downward and compute the percentage relationship that each statement item bears to the same item in the base year.
This article will outline the kinds of trend analysis, its uses in several industries, and how mastering this tool will help you in making decisions and give you an edge over others.
Main Features of Trend Analysis
Trend analysis has several key features that make it a valuable tool for understanding data and making predictions. Here are some of the main ones:
1. Focus on Time Series Data: Trend analysis primarily deals with data points collected over a period of time. This could be anything from daily stock prices to monthly sales figures or annual temperature readings. The chronological order of the data is crucial for identifying patterns and trends.
2. Data Visualization: Visual representations of data, such as line charts and graphs, are essential in trend analysis. They make it easier to spot patterns and trends that might be difficult to see in raw data.
3. Extrapolation and Prediction: Based on the identified trends, analysts often extrapolate into the future to make predictions about potential future values or outcomes. This can be useful for forecasting sales, market demand, or other key variables.
4. Historical Context: Trend analysis gives an historical background to the interpretation of current data. Through analyzing previous trends, organizations are able to base their decisions on previous patterns and actions. This is especially useful during strategic planning and resource allocation.
5. Anticipation of Future Trends: Trend analysis helps in identifying and anticipating future trends. By understanding how things have changed in the past, organizations can better prepare for potential shifts in the market, customer preferences, or other relevant factors.
6. Data-Driven Decision Making: Trend analysis enables businesses to make informed decisions, as opposed to making decisions based on intuition or guesswork. Trend analysis provides insights based on past data, enabling more strategic and informed decision-making to businesses.
How to Perform Trend Analysis?
The procedures for calculating the trend analysis are as follows: –
(1) the one year is taken as the base year; the first and last year should be taken as the base year
(2) Figure 100 is taken as the base year
(3) The base year is taken while calculating the trend percentage.
If a figure in another year is less than the figure in the base year then trend percentage less than 100 on another hand if the figure in another year is more than the figure in the base year then trend percentage is more than 100.
Illustration: – Calculate the trend percentage from the following figure of XYZ Ltd. Taking 2008 as a base year
| Year | Sales | Stock | (Rs. In Lakhs) Profits before tax |
| 2008
2009 2010 2011 2012 | 1881
2340 2655 3021 3768 | 709
781 816 944 1154 | 321
435 458 527 627 |
|
year | sales | stock | Profits before tax | ||||
| Amount
($’000) | Trend
percentage | Amount
($’000) | Trend
percentage | Amount
($’000) | Trend
percentage | ||
| 2008
2009 2010 2011 2012 | 1881
2340 2655 3021 3768 | 100
124 141 161 200 | 709
781 816 944 1154 | 100
110 115 133 162 | 321
435 458 527 672 | 100
136 143 164 209 | |
Interpretation
The figure of sales shows a rapid increases from 2008 to 2012. The percentage in 2012 is 200 as compared to 100 in 2004. The increase in sales is quite satisfactory.
The figure for the stock has also continuously increased from 2008 to 2012. The profits before tax continuously increased; profit during 2011 and 2012 is much higher as compared to 2010. We conclude that the expansion of the firm is good and the figure for sales and profits has doubled in just five years.
The profits of the concern have increased more than sales which show that there is proper control in the cost of goods sold, other expenditure and overall performance of the concern.
