The Essential Analysis

Not all companies meet or beat it, but they all have it. It is sometimes a long, drawn out process involving many parties and arguments back and forth, and for many, it is never finalized. What more can we say, it’s the Budget. The Budget is the standard for which a company sets its financial goals for a given period of time. There are many methods and tools used to determine the Budget numbers, but none more significant than Trend Analysis.

Trend Analysis is a forecasting technique that relies primarily on historical time series data to predict the future. The analysis involves searching for a right trend equation that will suitably describe the trend of a data series. Key ratios examined in Trend are turnover and balance sheet. Turnover ratios measure efficiency of converting assets into cash. Balance sheet ratios are the capital ratio which measure the ratio of equity capital to total assets, and liquidity ratios which measure a bank’s ability to cover deposit withdrawals and pay out funds to meet the credit needs of its borrowers. Other useful ratios are the loan-to-deposit ratio (total loans divided by total deposits), the charge-off ratio (net charge-offs as a percentage of total loans), the loan loss reserve ratio (loan loss reserves for potential bad loans as a percentage of total loans), and the ratio of nonperforming asset to total loans. And, although there are more determinants to a company’s financial status, trend projections are the most reasonable at predicting future performance because it measures the same items against each other. In the wake of the most recent financial crisis, trend analyzes may be skewed, but they are still the most reliable and meaningful factors used by business people, owners and investors in investigating the financial condition of not only a particular company but the industry as a whole.

Trend analysis is also used for more than just budgeting. It is used in determining credit, government studies, marketing efforts, stock market and many other daily situations. In credit analysis, detailed examinations of a company’s financial ratios and cash flow for several accounting periods are used to determine changes in a borrower’s financial position. Trend analysis is a key part of credit underwriting, and is a useful and necessary tool in determining whether the borrower’s financial strength is improving or deteriorating. Accounting ratios are often used by bank credit officers in evaluating creditworthiness of borrowers. The most widely used are: the acid-test ratio or quick ratio (short-term assets divided by current liabilities); the current ratio (current assets divided by current liabilities); and the debt coverage ratio (working capital divided by long-term debt). Financial ratios can be measured against ratios in prior years, or industry averages, for quick, easy comparison. Key performance ratios, such as the leverage ratio (long-term debt as a percentage of shareholder net worth), are frequently used in pricing commercial loans. This could be the determining factor in a loans interest rate, for example, the bank prime rate plus 25 basis points if financial leverage is kept at, or below, a certain level. The US Department of Interior does geological studies using trend analysis to determine water quality and the characteristics of non-normal distributions. These studies allow us to track water safety dealing with pH balances and the usage of said water. Marketing efforts using trend help a company determine product and service enhancements and how to communicate them to the customer. As an aspect of technical analysis that tries to predict the future movement of a stock based on past data, Trend analysis is helpful to investors because moving with trends, and not against them, will lead to profit for an investor. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. Trend Analysis, for the most part, is determined using linear techniques and is only measured quantitatively, never qualitatively. This makes trend analysis beneficial as an early indicator of potential opportunities or threats.

Today, trend analysis often refers to the science of studying changes in social patterns, including fashion, technology and the consumer behavior. This goes to show that the past will always influence the future.

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