Trend Analysis

The analysis of a variable's past value changes to determine if a trend exists and, if so, what the trend indicates. It is a comparative analysis of a company's financial ratios over an extended period of time. An aspect of technical analysis that tries to predict the future movement of a variable based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. Trend analysis is a form of comparative analysis that is often employed to identify current and future movements of an investment or group of investments. The process may involve comparing past and current financial ratios as they related to various institutions in order to project how long the current trend will continue. This type of information is extremely helpful to investors who wish to make the most from their investments. A trend analysis may be used to identify and project upswings in the performance of a stock or commodity, or to identify the potential for an upcoming downturn in value. By comparing the financial ratio of the past with the present and identifying key factors that helped the investment to arrive at the current point, it is possible to use the process of trend analysis to project future worth and adjust the components of the financial portfolio accordingly. Trend analysis calculates the percentage change for one account over a period of time of two years or more. In credit analysis, detailed examination of a company's financial ratios and cash flow for several accounting periods to determine changes in a borrower's financial position. Trend analysis is a key part of credit underwriting, and is a useful and necessary tool in determining whether the borrower's financial strength is improving or deteriorating. Key ratios examined include debt coverage ratio,turnover ratio (conversion of inventory and receivables to cash), and the quick assets ratio or quick ratio (current assets divided by current liabilities).

Short-, Intermediate- and Long-Term Trends

Simply put, short, intermediate and long-term trends are the three kinds of trends that we see each day in our study of technical analysis. "A trend is your friend", is just one of the sayings that have come out of the study of primary as well as secular trends. Given the understanding that the psychology of the markets actually moves the markets, we can acknowledge that psychology develops and ends the trends we are going to look at today.

Percentage change
To calculate the percentage change between two periods: 1. Calculate the amount of the increase/(decrease) for the period by subtracting the earlier year from the later year. If the difference is negative, the change is a decrease and if the difference is positive, it is an increase. 2. Divide the change by the earlier year's balance. The result is the percentage change. Calculation of Percentage Change 20X1 Cash Accounts Receivable, net 6,950 18,567 20X0 6,330 19,330 Increase/(Decrease) Percent Change 620 (763) 9.8% (3.9%)

Sales Rent Expense Net Income (Loss) Calculation notes:

129,000 103,000 10,000 8,130 0 (1,400)

26,000 10,000 9,530

25.2% N/M N/M

1. 20X0 is the earlier year so the amount in the 20X0 column is subtracted from the amount in the 20X1 column. 2. The percent change is the increase or decrease divided by the earlier amount (20X0 in this example) times 100. Written as a formula, the percent change is: 3. If the earliest year is zero or negative, the percent calculated will not be meaningful. N/M is used in the above table for not meaningful. 4. Most percents are rounded to one decimal place unless more are meaningful. 5. A small absolute rupee item may have a large percentage change and be considered misleading.

Trend percentages
To calculate the change over a longer period of timefor example, to develop a sales trendfollow the steps below: 1. Select the base year. 2. For each line item, divide the amount in each nonbase year by the amount in the base year and multiply by 100. 3. In the following example, 20W7 is the base year, so its percentages (see bottom half of the following table) are all 100.0. The percentages in the other

years were calculated by dividing each amount in a particular year by the corresponding amount in the base year and multiply by 100. Following is an example: Particulars Sales less: Cost of goods Sold Gross profit Add: Operating Income Less: Operating Expenses A) Administration Expenses: Management Expenses B) Selling and Distribution Expenses: Sales Expenses C) Financial Expenses: Interest on loans Total Operating Expenses Net Profit before Depriciation Less: Depriciation Net Profit before Tax Tax Less: Net Profit After Tax 2002 Rs. 50,000 32,000 18,000 18,000 2003 Rs. 60,000 38,000 22,000 22,000 2004 Rs. 72,000 46,000 26,000 26,000 2005 Rs. 86,400 56,000 30,400 30,400 2002 % 100 100 100 100 2003 % 120.00 118.75 122.22 122.22 2004 % 144.00 143.75 144.44 144.44 2005 % 172.80 175.00 168.88 16.88

3,000

3,500

4,000

4,500

100

116.66

133.33

149.99

5,000

6,000

72,000

8,640

100

120.00

144.00

172.80

3,000 11,000

4,000 13,500

5,000 16,200

6,000 19,140

100 100 100

133.33 122.72

166.66 147.27

199.99 173.99

7,000 5,000 2,000 800 1,200

8,500 4,500 4,000 2,000 2,000

9,800 600 3,800 1,850 1,950

11,260 6,500 4,760 2,400 2,360

100 100 100 100

121.42 90.00 200.00 250.00 166.66

139.99 120.00 190.00 231.25 162.49

160.85 130.00 238.00 300.00 196.66

Calculation notes: 1. The base year trend percentage is always 100.0%. A trend percentage of less than 100.0% means the balance has decreased below the base year level in that particular year. A trend percentage greater than 100.0% means the balance in that year has increased over the base year. A negative trend percentage represents a negative number. 2. If the base year is zero or negative, the trend percentage calculated will not be meaningful.