Expert: Dr. Joseph de Beauchamp - 3/1/2006

Question
Hello Sir,

I have a question about what is known as trend analysis on financial statements, often intertwined with horizontal analysis.  When performing trend analysis, I know you pick a base year, say the year 2000. For example say you had 5,000 in net income in 2000 and 10,000 in 2001.  Trend analysis you would have 100% in 2000, as it is the base year and 200% in 2001 (year/base year).  OK...my question is what if you had a net loss in the base year and positive net income in the following.  I'm confused as to how to apply the formula.  Referring back to my example: you would have positive 100% (-5,000/-5,000) in the base year 2000 (where you had a net loss), but then have negative -200% in 2001 (10,000/-5,000).  I would think that this would be difficult for a reader to interpret, as there would be a negative sign a year where there was positive net income. Is this the way that trend analysis is done?  I thought about absolute value, but then would that make the loss disappear.  I'm very confused.  Please help me clear up my confusion on this trend analysis.  Any help you can provide would be very very appreciated.

Thank you,
Matthew

Answer
Matthew,

Trouble with formula: past performance is no projectin of the future. You simply have a formula that does not work with even history. You have to make decisions on the future that formulas do not apply. You could go any number of directions with this formula above, and all be correct.

Dr. Joseph de Beauchamp