Definition of Trend Analysis
In the analysis of financial information, trend analysis is the presentation of amounts from several years all expressed as a percentage of a base year.
Trend analysis conveniently shows the reader certain key amounts for 5 or more consecutive years all expressed in easier to absorb amounts.
Example of Trend Analysis
Assume you want to see the trend of a service company's revenues, net income, and number of clients during the years 2016 through 2022. With trend analysis you can easily see how these three amounts have changed over the years especially in relation to each other.
To illustrate, we will designate 2016 to be the base year and the 2016 amounts will be restated to be 100. The amounts for the years 2017 through 2022 will be presented as the percentages of the 2016 amounts. In other words, each year's amounts will be divided by the 2016 amounts and the resulting percentage will be presented.
To begin, assume that the revenues for the years 2016 through 2022 were $31,691,000; $40,930,000; $50,704,000; $63,891,000; $79,341,000; $101,154,000; $120,200,000. In relation to the base year, the revenues are restated to: 100, 129, 160, 202, 250, 319, and 379.
Next, assume the net income amounts were divided by the 2016 net income. In relation to the base year, the net income amounts are 100, 147, 206, 253, 343, 467, and 423. Lastly, after the number of clients were divided by the base year number, the amounts as a percent of the base year amounts are: 100, 122, 149, 184, 229, 277, and 317.
From this trend analysis we see that
- Revenues in 2022 were 379% of the 2016 revenues
- Net income in 2022 was 423% of the 2016 net income
- Number of clients in 2022 was 317% of the number in 2016
The trend analysis makes it easier to see how effective and efficient the company has been in its recent years.