How can an analyst use trend analysis to analyze a company’s financial statements?
A.
Computer the company’s current ratios with its ratios from prior years to determine a trend.
B.
Review the company’s ratio over the past year, as they provide the best estimate of near-term performance and future trends.
C.
Identity trends by selecting the lowest ratio for the base year, even if a loss is experienced, as it represents a good starting point for analyzing the growth in the ratios.
D.
Analyze the ratios against companies in a wide a range of industries to see how the company is trending in the current economic cycle.
Trend analysisinvolves comparing a company’s financial ratios or metrics over several periods to identify patterns or changes that may indicate performance trends. This approach is essential for evaluating a company's financial health over time and detecting improvements or declines in critical financial metrics.
By analyzing thecurrent ratios—which measure liquidity and the company’s ability to cover short-term obligations—with data from prior years, an analyst can determine trends such asincreasing efficiency, solvency, or potential financial stress. This method provides meaningful insights into a company’s financial trajectory, supporting better decision-making.
Option B and C are incorrect because they either limit the analysis to a short timeframe or ignore the significance of using a stable and representative base year. Option D deviates from the principle of selecting relevant industry peers.
References:
Volume 2, Chapter 14: Company Analysis, Trend Analysis,Canadian Securities Course.
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