What is trend analysis?

Trend analysis is a method used in technical analysis that tries to predict the future. Under this system, Revenue and cost information from a company’s income statement is arranged on a trend line for multiple reporting periods and then examined for trends and inconsistencies. The object of trend analysis is to spot actionable patterns from the information.  The method is quite useful for reviewing early financial statements for inaccuracies and to see whether adjustments can be made before the statements are presented for general use.

For example, if the management notices abrupt increase in the business expenses in the first month followed by sharp decline in the second month signs a possibility that the expense was booked twice in the first month. In such cases, the account section of the company has to verify the reason and see whether adjustment can be made before final statement is presented. Thus, the trend analysis is one of the most useful management tools available for ‘Revenue and Cost analyses’ of a business.

Trend analysis system is also useful for scrutinizing revenue pattern of a business. In a business review, the management would evaluate why sales are declining for certain products, customers, or a particular sales region. Further it scrutinizes expense report to check for presence of any fraudulent claims, unusual expenditure which would lead to further investigation. Further, the ‘Trend analysis’ is useful in budgeting for the following season particularly in respect of revenue and expense line items.

A share market investor can generate a trend line of historical share prices, and use this information to predict future changes in the price of a stock. However, in view of historical time series may not always yield a valid prediction of the future, there must be a substantial amount of additional research go with trend analysis when using it to make predictions.