Trend Analysis
AdvancedTrend analysis is the examination of financial or operating data over several periods to identify patterns, such as steady growth, decline or changes in direction.
A single year's figures say little on their own. Looking at the same measure over five or ten years reveals whether performance is improving, deteriorating or stable.
Analysts often express figures as a percentage of a base year, set to 100. For example, if a company's revenue was 200 in the base year, 216 a year later and 234 the year after, the trend index reads 100, 108 and 117, showing steady growth. Comparing this with the trend in costs or profits can show whether margins are improving.
Trend analysis is applied to revenue, costs, margins, cash flow, ratios such as return on equity and debt levels, and operating measures such as customer numbers. It is closely related to horizontal analysis of financial statements.
Trends can be distorted by one-off events, acquisitions, changes in accounting policies or inflation. Past trends also do not guarantee future results. Combining trend analysis with comparisons against competitors gives a fuller picture.
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