Trend Analysis

What is Trend Analysis?

Trend analysis is an analysis of the trend of the company by comparing its financial statements to analyze the trend of market or analysis of the future on the basis of results of past performance and it’s an attempt to make the best decisions on the basis of results of the analysis done.

Trend analysis involves collecting the information from multiple periods and plotting the collected information on the horizontal line with the objective of finding actionable patterns from the given information. In Finance, Trend Analysis is used for Technical analysis and Accounting analysis of stocks.

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Types of Trend

Types of Trend

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#1 – Uptrend

An uptrend or bull market is when financial markets and assets – as with the broader economy level – move in the upward directions and keep increasing prices of the stock or the assets or even the size of the economy over the period. It is a time of booming where jobs get created, the economy moves into a positive market, and sentiments in the markets are favorable, and the investment cycle has started.

#2 – Downtrend

A downtrend or bear market is when financial markets and asset prices – as with the broader economy level – move in the downward direction and prices of the stock or the assets or even the size of the economy keep on decreasing over time. It is the time when companies shut down the operation or shrink the production due to a slump in sales. Jobs are lost, and asset prices start declining, sentiment in the market is not favorable for further investment, investors run for the haven of the investment.

#3 – Sideways / horizontal Trend

A sideways/horizontal trend means assets prices or share prices – as with the broader economy level – are not moving in any direction; they are moving sideways, up for some time, then down for some time. The direction of the trend cannot be decided. It is the trend where investors are worried about their investment, and the government is trying to push the economy in the uptrend. Generally, the sideways or horizontal trend is considered risky because when sentiments will be turned against cannot be predicted; hence investors try to keep away in such a situation.

What is the Use of Trend Analysis?

It is used by both – Accounting analysis and technical analysis.

#1 – Use in Accounting

Sales and cost information of the organization’s profit and loss statement can be arranged on a horizontal line for multiple periods and examined the trends and data inconsistencies. For instance, take the example of a sudden spike in the expenses in a particular quarter followed by a sharp decline in the next period, is an indicator of expenses was booked twice in the first quarter. Thus the trend analysis in accounting is essential for examining the financial statements for inaccuracies, to see whether the adjustment of the certain heads should be made before the conclusion is drawn from the financial statements.

Trend Analysis in accounting compares the overall growth of key financial statement line itemKey Financial Statement Line ItemFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more over the years from the base case.

For example, in the case of Colgate, we assume that 2007 is the base case and analyze the performance in Sales and Net profit over the years.

  • We note that Sales has increased by only 16.3% over 8 years (2008-2015).
  • We also note that the overall net profit has decreased by 20.3% over the 8 years.
Trend Analysis - Colgate

For forecasting, estimated financial statements trend analysis is used for the head where no significant changes have happened. For example, if employee expense is taken 18 % of the revenue and considerable changes have not been made in the employees, then for estimated financial statements, employee expense can be taken as 18 %.

Internal use of the trend analysis in accounting (the revenue and cost analysis) is one of the most useful management tools for forecasting.

#2 – Use in Technical Analysis

An investor can create his trend line from the historical stock prices, and he can use this information to predict the future movement of the stock price. The trend can be associated with the given information. Cause and effect relationships must be studied before taking concluding the trend analysis.

Trend Analysis - Technical

Examples of Trend Analysis

What is the Importance of Trend Analysis?

Conclusion

The trend is a friend, is a well-known quote in the trader’s fraternity. The trader makes a good profit by following the trend, and trend analysis is not an easy task. It required eyes on details and an understanding of the market dynamics.

The trend analysis in accounting can be used by management or the analyst to forecast future financial statements. Following blindly can turn out to be dangerous if a proper analysis of the past event is not done.

This article has been a guide to what is Trend Analysis and its meaning. Here we discuss how Trend analysis works in Accounting & Technical analysis along with practical examples. You can also learn more from the following resources –

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Comments

  1. lisa says

    awesome, your article is very helpful!

    thanks so much!!!

    • Dheeraj Vaidya says

      Thanks for your kind words!

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