# Trend Analysis

Trend analysis is a technique used in financial statement analysis that involves examining financial data over time to identify patterns and trends. This method can be used to analyze a variety of financial metrics, including revenue, expenses, profits, and ratios. By analyzing trends in financial data, analysts can gain insights into a company’s financial performance and make informed decisions about investing or lending to the company.

Formula for Trend Analysis:

The formula for trend analysis is relatively simple. It involves calculating the percentage change in a financial metric over time. The formula is as follows:

Percentage Change = (Current Year Value – Previous Year Value) / Previous Year Value x 100

For example, if a company’s revenue was \$100,000 in the previous year and \$120,000 in the current year, the percentage change in revenue would be calculated as follows:

Percentage Change in Revenue = (\$120,000 – \$100,000) / \$100,000 x 100 = 20%

This means that the company’s revenue increased by 20% from the previous year.

Example Table:

To illustrate trend analysis, let’s consider the following example table:

 Year Revenue Expenses Profit 2016 \$100,000 \$80,000 \$20,000 2017 \$120,000 \$90,000 \$30,000 2018 \$130,000 \$100,000 \$30,000 2019 \$140,000 \$110,000 \$30,000 2020 \$150,000 \$120,000 \$30,000

Using the formula above, we can calculate the percentage change for each financial metric over time. For example, the percentage change in revenue from 2016 to 2017 is:

Percentage Change in Revenue (2016 to 2017) = (\$120,000 – \$100,000) / \$100,000 x 100 = 20%

We can repeat this calculation for each year and for each financial metric. The results are shown in the following table:

 Year Revenue % Change Expenses % Change Profit % Change 2016 – – – 2017 20% 12.5% 50% 2018 8.33% 11.11% 0% 2019 7.69% 10% 0% 2020 7.14% 9.09% 0%

• Helps in forecasting future performance: Trend analysis provides a historical perspective of the financial statements which helps in forecasting future performance of the company.
• Easy to understand: Trend analysis is simple and easy to understand as it involves the comparison of financial data of different periods.
• Identifies the direction of change: Trend analysis helps in identifying the direction of change, whether it is positive or negative, in the financial statement items. This information can be useful in decision-making.
• Helps in identifying the business cycle: Trend analysis can also help in identifying the business cycle, which is the pattern of growth and contraction of the economy over a period of time.
• Helps in benchmarking: Trend analysis helps in benchmarking the performance of a company against its competitors in the same industry.