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

x 100Amount of base year

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 in an 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 Rs.

Net Sales xx

Less: Cost of goods Sold xx

Gross Profit xx

Add: Operating Income xx

  xxx

Less: Operating Expenses

(1) Administrative Expenses xx

(ii) Selling and Distribution Expenses xx

(iii) Finance Expenses xx xx

Earning Before Depreciation interest and Tax(EDBIT) 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

Proforma of Income statement

Rs.

(I)Sources Of Funds (1) Owned Funds (2) Borrowed Funds

Total Employed Funds

(Ii) Application Of Funds Fixed Asset Long Term Investments Working CapitalTotal Net Assets Owned

xxxxxxxx

xxxx

xxxxxxxxxxxx

xxxx

Proforma of Balance Sheet

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

Total Expenses 11000 13500 16200 19140

Profit before Depreciation 7000 8500 9800 11260

Depreciation 5000 4500 6000 6500

Profit before Tax 2000 4000 3800 4760

Income Tax 800 2000 1850 2400

Profit after Tax 1200 2000 1950 2360

  2002 2003 2004 2005

  Rs. % Rs. % 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

Less: Operating Expenses:

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 800 100 950 118.75 1120 140.00 1314 164.25

Profit/Earnings Before Depreciation, Interest & Tax (EBDIT) 1000 100 1250 125.00 1480 148.00 1726 172.60

Less: Interest in Loans 300 100 400 133.33 500 166.67 600 200.00

Profit/Earnings Before Depreciation & 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

Comments

Trend Analysis of Income Statement

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:

    2002      2003        2004        2005

    2002      2003        2004        2005

    2002      2003        2004        2005

    2002      2003        2004        2005

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.

    2002      2003        2004        2005

    2002      2003        2004        2005

    2002      2003        2004        2005

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.

 Years Base 

Year  2005 2004 2003 2002  (Rs.) (Rs.) (Rs.) (Rs.)  (in 000) (in 000) (in 000) (in 000)Assets:        Fixed Assets 1000 2000 1250 1250Accumulated Depreciation @ 20% of Original Cost

200 400 250 250

Written Down Value 800 1600 1000 1000Current Assets 1400 1000 800 1000Less: Current Liabilities 700 600 500 500Working Capital 700 400 300 500Capital Employed 1500 2000 1300 1500Liabilities:        Share Capital 1000 1100 520 1000Reserves 320 100 300 200Net Worth 1320 1200 820 1200Debts 180 800 480 300Capital Employed 1500 2000 1300 1500

  2002 2003 2004 2005

  Rs. % Rs. % Rs. % Rs. %

(I) Sources of Funds:

(1) Owned Funds:

Share Capital 1000 100 520 52.00 1100 110.00 1000 100

Reserves 200 100 300 150.00 100 50.00 320 160

Net Worth 1200 100 820 68.33 1200 100.00 1320 110

(2) Borrowed Funds:

Debts 300 100 480 160.00 800 266.67 180 60

Capital Employed 1500 100 1300 86.67 2000 133.33 1500 100

(II) Application of Funds:

(1) Fixed Assets: (At Cost) 1250 100 1250 100.00 2000 160.00 1000 80

Less: Accumulated Depretiation @ 20% of Original Cost 250 100 250 100.00 400 160.00 200 80

WDV 1000 100 1000 100.00 1600 160.00 800 80

(2) Working Capital:

Current Assets 1000 100 800 80.00 1000 100.00 1400 140

Trend Analysis of Balance Sheet

Less: Current Liabilities 500 100 500 100.00 600 120.00 700 140

Working Capital 500 100 300 60.00 400 80.00 700 140

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

    2002      2003        2004        2005

    2002      2003        2004        2005

    2002      2003        2004        2005

Working Capital:

Capital Employed:

    2002      2003        2004        2005

    2002      2003        2004        2005