Two common types of analyses used for financial statements and stocks are trend analysis and comparative analysis. Trend analysis is actually a form of comparative analysis and generally uses percentages or ratios to compare information. Comparative analysis takes several periods of information and compares them from period to period.
Trend analysis is designed to look for trends whereas comparative analysis simply compares changes from period to period. Both types of analyses use the same information when examining financial statements or stocks. Investors and analysts base decisions on the results of the investigations.
Trend Analysis of Financial Statements
When trend analysis is used for financial statements, an analyst may take three years of information and compare it. To complete a trend analysis, the information from a financial statement is often expressed in terms of percentages. For example, an analyst performing a trend analysis on an income statement will express every item on the statement in terms of its percentage of net profit or loss. He will then compare these percentages for the three years to look for any trends. Investors also use trend analysis on balance sheets by calculating the percentage of each account compared to the total amounts. For example, on a balance sheet each asset is listed as a percentage of total assets.
Comparative Analysis of Financial Statements
When an analyst or investor uses comparative analysis for financial statements, she gathers several years of statements and lists them on one page. For example, if she is comparing balance sheets, she gathers the previous three years’ statements. She lists the accounts and the balances of each for all three years and compares them to look for changes. When this occurs, the balance sheet is called a comparative balance sheet. This is also done with income statements.
The same type of analysis is done when analyzing stocks. Investors take a stock and compare several periods of information about the stock. They look for changes when using comparative analysis and they look for trends when using trend analysis. Both types of analyses are used to determine how the stock got to the present price and where investors believe the stock price is heading.