Trend analysis is a comparative analysis often employed to identify an investment or group’s current arid future movements.

The process may involve comparing past and current financial ratios 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 the current and future movements of an investment or group of investments.
• It compares past and current financial ratios of 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?

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

It is unnecessary to include all the items in the financial statements, and 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 comparing the changes in the composition of working capital items over the year.

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