Trend Analysis:

Trend analysis is an attempt to make the best decisions based on the results of the analysis done
by comparing the company's financial statements to analyses the market trend or future analysis
based on past performance results, and it's an attempt to make the best decisions based on the
results of the analysis done. The income statement, statement of retained earnings, balance sheet,
and statement of cash flows, among other financial information, can be analyzed. When
considering the outcomes from analysis, it is important for a company to understand that data
produced needs to be compared to others within industry and close competitors. The company
should also consider their past experience and how it corresponds to current and future
performance expectations. Three common analysis tools are used for decision-making are
horizontal analysis, vertical analysis, and financial ratios.
Horizontal Analysis:
Horizontal analysis also known as trend analysis looks at trends over time on various financial
statement line items. A company will look at one period, usually a year and compare it to another
period. It is most valuable to do horizontal analysis for information over multiple periods to see
how change is occurring for each line item. The year being used for comparison purposes is
called the base year (usually the prior period). The year of comparison for horizontal analysis is
analyzed for change and percent changes against the base year.
Vertical Analysis:
Vertical analysis shows a comparison of a line item within a statement to another line item
within that same statement. This can help a business to know how much of one item is
contributing to overall operations. The company will need to determine which line item they are
comparing all items to within that statement and then calculate the percentage makeup. These
percentages are considered common size because they make businesses within industry
comparable by taking out fluctuations for size.
Benefits:
The information obtained from this analysis can benefit decision-making for internal and
external stakeholders and can give a company valuable information on overall performance and
specific areas for improvement. The analysis can help them with budgeting, deciding where to
cut costs, how to increase revenues, and future capital investments opportunities. Trend
Analysis can be helpful in making future business decisions. Converting information to
percentages or ratios eliminates some of the disparity between competitor sizes and operating
abilities, making it easier for stakeholders to make informed decisions. It can assist with
understanding the makeup of current operations within the business, and which shifts need to
occur internally to increase productivity. A company that wants to budget properly, control costs,
increase revenues, and make long term expenditure decisions may want to use these analysis to
guide future operations. As long as the company understands the limitations of the information
provided, trend analysis is a good tool to predict growth and company financial strength.
Ratios:
LIQUIDITY RATIOS:

WORKING CAPITAL=Current Assets−Current Liabilities

Current Assets
CURRENT RATIO=
Current Liabilities

Quick Assests
QUICK RATIO=
Quick Liabilities
DEBT TO EQUITY RATIO:
Long term liabilities
DEBT ¿ EQUITY RATIO=
Share Holders Fund
TIMES INTEREST EARNED RATIO:
Earnings Before Interest∧Tax
¿ INTEREST RATIO=
Interest Expense
EFFICIENCY RATIOS:
Net Credit Sales
ACCOUNTS RECIEVABLE TURNOVER =
Average Accounts Recieveable
Inventory turnover:
C ost of good sold
I nventory T urnover=
A verage turnover
Days’ Sales in Inventory:
E nding inventory
Days sales∈i nventory= ( 360 )
C ost of goods sold
Profit Margin:
N et income
Profit Margin=
N et sales
Return on Total Assets:
Net income
Return on Total Assets=
Average total assets
Return on Equity:
 Net income
Rate on Equity=
Average stockholders equity