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Trend Analysis

Trend analysis is a technique used to analyze financial data over a period to identify patterns and growth trends. It helps understand how a company's performance has changed over time.

1. Setting a Base Year

Trend analysis involves selecting a base year and setting its values to 100. Subsequent years' values are then expressed as a percentage of the base year's values. This allows for easy comparison of growth rates over time.

2. Trend Analysis of the Balance Sheet

Example (Capital Side):

Assume a base year of 2011. A simplified trend analysis of the capital side of a balance sheet might look like this:

Item 2011 2012 2013 ... 2021
Share Capital 100 100 100 ... 100
Reserves/Other Equity 100 150 200 ... 500
Borrowings 100 90 80 ... 50
Trade Payables 100 120 150 ... 250
Other Liabilities 100 110 130 ... 200

Analysis:

  • Share capital remained constant, indicating no new equity issuance.
  • Reserves/other equity increased significantly (five times), showing strong retained earnings.
  • Borrowings decreased, suggesting reduced reliance on debt financing.
  • Trade payables and other liabilities increased, likely due to business expansion and increased procurement of raw materials.

Example (Asset Side):

Item 2011 2012 2013 ... 2021
Fixed Assets 100 120 150 ... 469
Inventory 100 110 130 ... 220
Trade Receivables 100 115 140 ... 210
Cash and Bank Balance 100 95 85 ... 70

Analysis:

  • All asset values increased except cash and bank balance, indicating reinvestment in the business.
  • The increase in fixed assets suggests capacity expansion.
  • The increase in inventory and trade receivables is consistent with increased sales and credit sales.

3. Trend Analysis of the Profit and Loss (Income) Statement

Example:

Item 2011 2012 2013 ... 2021
Sales 100 130 160 ... 284
Profit After Tax (PAT) 100 140 180 ... 342

Analysis:

  • Sales increased by 2.84 times.
  • PAT increased by 3.42 times, indicating improved profitability.
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