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 ARE you talking about tracking stocks in the market?
A base year is often the first year of operations.
But a year of minus net profits is NEVER considered
a positive.
I would like to learn more about what you are learning.
Sometimes, an instructor likes to be fancy in his/her
analysis and thus, his rules only make sense to him.
The only time I see where this trend analysis can work
on an income statement is when one goes from having
a Research and Development operation and next to it
mathematically and operationally, the BRING it to market
company. An R and D company STARTS with a negative,
in all cases.
