Fundamentals of Financial Analysis , Trend Analysis

Fundamentals of Financial Analysis

Chapter: 9 Fundamentals of Financial Analysis

Section: 4 Trend Analysis

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In trend analysis, the analyzed financial data of a given company is compared over a period of time. This is also known as horizontal analysis. This helps the analyst to visualize any improvement or deterioration of the firms’ financial condition and performance over a period of time. In other words, this analysis establishes the trend of the financial variables over a given period. Calculated financial ratios are used in trend analysis as they are meaningful and self-explanatory. The key financial ratios of AB Ltd is given below to illustrate trend analysis.

	1999	2000	2001	2002	2003
Turnover	500	600	750	830	1040
G.Profit	200	252	310	360	437
N. Profit	130	110	97	110	115
Total Assets	1000	1100	1210	1840	2480

	1999	2000	2001	2002	2003
Turnover	500	600	750	830	1040
T/O Growth	-	20%	25%	11%	25%
G.P.Margin	40%	42%	41%	43%	42%
N.P.Margin	26%	18%	13%	13%	11%
ROA	13%	10%	8%	6%	5%

Turnover has recorded a steady growth except for year 2002. Gross profit margin has shown a marginal improvement form 40% in 1999 to 42% in 2003. However it is noteworthy to mention that there is a significant drop in the net profit margin. Net margin was 26% in 1999 and deteriorated to 11% in 2003. In line with this, the return on total assets ratio has declined. This is mainly due to the escalating overheads. AB Ltd should investigate the substantial increase in operational expenses.

Following graphical application is useful to establish the trend;

The above graph is developed using gross profit margin, net profit margin and return on assets. It clearly demonstrates that AB Ltd is experiencing a deterioration of the bottom-line over the five year period despite the remarkable growth in turnover and marginal improvement in gross profit margins.

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