Trend Analysis: Definition, Importance

Trend AnalysisTrend analysis is a form of comparative analysis that is often employed to identify current arid 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 to project how long the current trend will continue. This type of information is beneficial to investors who wish to make the most of their investments.

Importance of Trend Analysis

  • Trend analysis identifies current and future movements of an investment or group of investments.
  • It is comparing past and current financial ratios as they related to various institutions to project how long the current trend will continue.
  • It is helpful to investors who wish to make the most of their investments.
  • The process of a trend analysis begins with identifying the category of the investments that are under consideration.
  • It is possible to determine if all or most of those factors are still exerting an influence.

What information can be obtained from trend analysis?

Financial statements covering more than 3 years in undertaken, the year-to-year method of Comparison may become too cumbersome. The best way to effect such longer-term Comparisons is by-means of index numbers.

It is not necessary to include in it all the items in the financial statements. Only the most significant Sterns need to be included in such a comparison.

The analyst may use comparative advantage statements of cash flows. The index-number-trend comparison is very well suited to a comparison of the changes in the composition of working capital items over the year.

The economic environments covering die periods compared are the periods compared are, the better a picture can be obtained by the analyst of how the enterprise has weathered its adversities and taken advantage of its opportunities.

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