Trend Analysis

Meaning

Trend analysis is also termed as trend percentage. It is used for the purpose of comparative study of financial statements over a number of years. In case of trend analysis minimum three year financial data is a must. Out of the periods under study, one year is taken as the base year and each item in this year is taken as 100. Trend percentages are computed by dividing amount of each item in the statement of each remaining year with the corresponding item in the base statement and the result is expressed in percentage.

Trend Percentage =

Amount of year under study Amount of base year

x 100

A downward trend will be clearly indicated by the trend percentages being less than 100. An upward trend will be indicated by the trend percentages being more than 100.

The trend percentage facilitates an efficient comparative study of the financial performance of a business enterprise over a period of a time. While preparing a trend analysis the base year selected must be a representative of a normal year. During inflationary periods the data over a period of time becomes incomparable unless the absolute rupee is adjusted. Even though the trend percentage provide significant information, undue importance must not be laid down on the percentage when there is small number in the base year in such a case even a slight variation will be magnified by the percentage change. Trend analysis might also be useful to compare such trends with similar trends in business generally and the industry concerned in particular.

Features of Trend Analysis

(1) In case of trend analysis all the given years are arranged inan ascending order.

(2) The first year is termed as the “base year” and all figure of the base year is taken as 100%.

(3) Items in the subsequent year are compare with that of the base year.

(4) In the percentage in the following years is above 100% it indicates an increase over the base year and if the percentage are below the 100% it indicates a decrease over the base year.

(5) A trend analysis helps in analysing the financial performance of the business.

(6) Trend analysis gives a better picture of the overall performance of the business.

(7) A trend analysis indicates in which direction business is moving i.e. upward or downwards.

(8) For trend analysis at least three year data is required.

Particulars

Rs

Net Sales

xx

Less: Cost of goods Sold

xx

Rs.

Gross Profit

xx

Add: Operating Income

xx xxx

Less: Operating Expenses (1) Administrative Expenses

xx

(ii) Selling and Distribution Expenses

xx

(iii) Finance Expenses Earning Before Depreciation interest and

xx

Tax(EDBIT)

xx xxxx

LESS: Depreciation

xx

Earning Before Interest and Tax(EBIT)

xxxx

Less: Interest on long term Borrowings

xx

Net operating Profit/Operating Net Profit

xxxx

Add: Non-Operating Income

xx xxxx

Less: NON Operating Expenses

xx

NET Profit Before tax(NPBT)

xxxx

Less: provision for Income Tax

xx

Net Profit after Tax (NPAT)

xxxx

Rs. (I)Sources Of Funds (1) Owned Funds

xxxx

(2) Borrowed Funds

xxxx xxxx

Total Employed Funds xxxx (Ii) Application Of Funds

xxxx

Fixed Asset

xxxx

Long Term Investments

xxxx

Working Capital

Total Net Assets Owned

Illustration on Trend Analysis of Income Statement

Four Years revenue/income statements are given below. Trend Analysis is to be made and commented on it.

2002

2003

2004

2005

Rs.

Rs.

Rs.

Rs.

Sales

50000

60000

72000

86400

Less: Cost of Sales

32000

38000

46000

56000

Margin

18000

22000

26000

30400

Management Expenses

3000

3500

4000

4500

Sales Expenses

5000

6000

7200

8640

Interest on Loans

3000

4000

5000

6000

11000

13500

16200

19140

Profit before Depreciation

7000

8500

9800

11260

Depreciation

5000

4500

6000

6500

Profit before Tax

2000

4000

3800

4760

800

2000

1850

2400

1200

2000

1950

2360

Total Expenses

Income Tax Profit after Tax

2002

2003 Rs.

2004 %

Rs.

2005

Rs.

%

%

Rs.

%

Net Sales

5000

100

6000 120.00 7200

144.00

8640 172.80

Less: Cost of Sales

3200

100

3800 118.75 4600

143.75

5600 175.00

Gross Margin

1800

100

2200 122.22 2600

144.44

3040 168.89

Management Expenses

300

100

350 116.67

400

133.33

450

150.00

Sales Expenses

500

100

600 120.00

720

144.00

864

172.80

Total Operating Expenses Profit/Earnings Before Depreciation,

800

100

950 118.75 1120

140.00

1314 164.25

Interest & Tax (EBDIT)

1000

100

1250 125.00 1480

148.00

1726 172.60

Less: Interest in Loans Profit/Earnings Before Depreciation &

300

100

400 133.33

500

166.67

600

Tax

700

100

850 121.43

980

140.00

1126 160.86

Less: Depreciation

500

100

450

90.00

600

120.00

650

130.00

Profit/Earnings Before Tax

200

100

400 200.00

380

190.00

476

238.00

Less: Income Tax

80

100

200 250.00

185

231.25

240

300.00

Profit/Earnings After Tax

120

100

200 166.67

195

162.50

236

196.67

Less: Operating Expenses:

200.00

Comments Net Sales:

In the year 2002, net sales amounted to Rs. 5000. In the year 2003, it came to Rs.6000, and in the subsequent years like in 2004 & 2005 it increased to Rs. 7200 & Rs. 8640 respectively. As every company wants to sustain and grow in the market, it has to increase its sales and thereby profit. Therefore by increasing net sales every year the company was simultaneously increasing its profits also.

Gross Margin:

With the increasing net sales of the company, gross margin was also increasing. This shows that the company is concentrating properly on gross margin.

Total Operating Expenses:

Total operating Expenses comprises of Management Exp. & Sales Exp. The graph of total operating expenses is the upward movement, it means that expenses are also increasing and this exp. are increasing because of increase in amount of sales as well as it may be that either the expenses of carrying out sales are being increased. EBDIT:

Earnings before depreciation, interest, and tax. This graph is also showing the constant rise in trend as everything is stable and attaining the steps of growth.

EBDT:

Earnings before depreciation, & tax, but after deducting Interest. In 2002, the interest was Rs.700, then it was Rs.980 in 2004 and further increase was Rs.1126 in 2005. This states that the amount of interest company was paying was not fluctuating much.

EBT:

Earnings before tax, and after depreciation and interest. In year 2002, it was Rs.200, and then it increased to rs.400 in the year 2003, i.e. twice of the base year, in 2004 it reduced to rs.380 and again rose to Rs.476 in 2005. We can say that it reduced in 2004 due to rise in depreciation amount that year. As the depreciation was more, the amount after deducting (ID) resulted in a fall in EBT that year.

Earnings after tax:

Earnings or profit were fluctuating due to fluctuation in the rate of depreciation or change in current assets.

Illustration on Trend Analysis of Income Statement

Four Years revenue/income statements are given below. Trend Analysis is to be made and commented on it.

2005 (Rs.) (in 000)

2004 (Rs.) (in 000)

2003 (Rs.) (in 000)

Base Year 2002 (Rs.) (in 000)

1000

2000

1250

1250

200

400

250

250

800 1400 700 700 1500

1600 1000 600 400 2000

1000 800 500 300 1300

1000 1000 500 500 1500

1000 320 1320 180 1500

1100 100 1200 800 2000

520 300 820 480 1300

1000 200 1200 300 1500

Years

Assets: Fixed Assets Accumulated Depreciation @ 20% of Original Cost Written Down Value Current Assets Less: Current Liabilities Working Capital Capital Employed Liabilities: Share Capital Reserves Net Worth Debts Capital Employed

2002

2003

2004

2005

Rs.

%

Rs.

%

Rs.

% Rs.

%

Share Capital

1000

100

520

52.00

1100

110.00 1000

100

Reserves

200

100

300

150.00

100

50.00320

160

Net Worth

1200

100

820

68.33

1200

100.00 1320

110

Debts

300

100

480

160.00

800

266.67180

60

Capital Employed

1500

100

1300

86.67

2000

133.33 1500

100

(1) Fixed Assets: (At Cost)

1250

100

1250 100.00 2000

160.00 1000

80

Less: Accumulated Depretiation @ 20% of Original Cost

250

100

250

400

160.00200

80

WDV

1000

100

1000 100.00 1600

160.00800

80

1000

100

800

80.00

1000

100.00 1400

140

500

100

500

100.00

600

120.00700

140

(I) Sources of Funds: (1) Owned Funds:

(2) Borrowed Funds:

(II) Application of Funds:

100.00

(2) Working Capital: Current Assets Less: Current Liabilities

Working Capital

500

100

300

60.00

400

80.00700

140

Capital Employed

1500

100

1300

86.67

2000

133.33 1500

100

Comments Net Worth:

Net Worth has decreased in the year 2003 but increased in the following years. The face value of each share has decreased, this may be a reason which resulted in a fall in net worth during 2003. The reason of increase in the net worth during 2004 and 2005 may be the face values of shares have raised or the company may have issued additional shares.

Borrowed Funds:

Borrowed funds have increased in the years 2003 and 2004 but in the year 2005 it indicates a decline. The reason for the increase in 2003 and 2004 may be due to additional borrowings and the reason for the decline in debts during the year 2005 was may be due to redemption of debentures or it may be such that the company had enough of funds so there is no need to borrow.

Fixed Assets:

Fixed assets has remained the same in the year 2003; in the year 2004 it indicates an increase but in the year 2005

Working Capital:

Capital Employed: