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Trend Analysis Vs Ratio Analysis
Businesses use past and present data in order to find a pattern and predict the future. This review of past and present forms of data is usually known as Trend Analysis which is one of the most popular tools in the hands of financial analysts and managers. Ratio analysis, on the other hand, are tools to measure the various relationships between two or more financial items.
Financial ratios can be used to represent trend analysis. In fact, financial ratios are the backbone of trend analysis.
Trend Analysis Vs Ratio Analysis
Following are the differences between Trend analysis and Ratio analysis −
Based on the Same Platform
Ratio and trend analysis have the same inputs for calculations—the financial statements. The financial statements provide the initial inputs to calculate the trends. Trend analysis often tracks the changes occurring in each line of a financial statement. Sometimes, it may look for percentage changes as well.
Ratios, on the other hand, are related to different items put together to judge a relationship among the items. The accountants calculate the ratios and they don’t usually have to be in the same line of financial statements in general.
Therefore, trend analysis provides the details of improvement in certain areas of business operation while ratios offer an idea of performance depending on two or more items from the financial statements.
Trend Analysis from Ratios
In comparison to trend analysis, ratios consume a bit more time to calculate. As there is no automatic software to calculate the ratios that lead to trends, accountants need to formulate the relationships with the data available at the hand in order to calculate the financial ratios.
Moreover, such ratios can be stored for future use and when they are put in a series or accumulated over time to estimate situations, they are called trend analysis. Therefore, ratios can lead to trend analysis, but the reverse is not true in most cases.
Use in Picking Stocks
There is one more arena of common use for trend analysis and ratio analysis. It is the area of picking stocks. Stock trends are a popular tool for investors because they may use them to make a decision whether to invest in a particular stock or not. The process of checking the trend of stock prices is known as fundamental analysis.
Fundamental analysis analyzes the strength of companies behind the stocks to check their future performance. Ratios can help the investors carry out the fundamental analysis. If the performance indicators in the fundamental analysis are strong, investors can pick those stocks for investment.
A simple way to do fundamental analysis is to check a few financial ratios, such as financial leverage, asset turnover, and profitability ratios. Performing these analyses helps investors to choose the right stock irrespective of the tenure they are actively performing in the markets.
Comparison of Scale of Business
Ratio analysis also helps businesses compare themselves with companies of scale. Usually, it is not possible for a company to compare itself with a large firm in terms of efficiency and profitability. Using ratios that need items that are common in the case of both small and large companies can be used to determine the relative strength and performance of the two companies even if their scale of performance is different. Ratios can help small businesses create their own trends. This can help them look for better opportunities and offer an insight into the needs that can transform their level of business.
Conclusion
Both trend analysis and ratio analysis are done to assess the profitability and performance of businesses. Irrespective of the size and scale of businesses, these analyses can help organizations have an insight into their business performance over a specified period of time. The ratio analysis is often used to calculate the trends and that is why trend and ratio analyses are connected to each other.
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