Trend Analysis, Worked
Chapter Sixteen
Syllabus topic 2, "Trend Analysis – Concept, selection of base year, computation of trend percentages and interpretation of trends in sales, profits, assets, liabilities and shareholders’ funds."
Pages 39 to 40 of 162
The figures
Sunrise Industries Ltd, five years to 31 March 2027.
| Year ended 31 March | Sales, Rs | Net profit after tax, Rs | Total assets, Rs | Shareholders' funds, Rs | Long-term liabilities, Rs |
|---|---|---|---|---|---|
| 2023 | 10,00,000 | 1,40,000 | 14,00,000 | 10,00,000 | 4,00,000 |
| 2024 | 12,00,000 | 1,54,000 | 15,40,000 | 10,80,000 | 4,00,000 |
| 2025 | 14,00,000 | 1,68,000 | 17,50,000 | 11,90,000 | 4,00,000 |
| 2026 | 16,00,000 | 1,82,000 | 19,90,000 | 13,40,000 | 4,00,000 |
| 2027 | 20,00,000 | 2,38,000 | 22,60,000 | 15,00,000 | 4,00,000 |
The trend statement, 2023 as the base
Sunrise Industries Ltd Statement of trend percentages, base year 2023 = 100
| Year ended 31 March | Sales | Net profit after tax | Total assets | Shareholders' funds | Long-term liabilities |
|---|---|---|---|---|---|
| 2023 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
| 2024 | 120.00 | 110.00 | 110.00 | 108.00 | 100.00 |
| 2025 | 140.00 | 120.00 | 125.00 | 119.00 | 100.00 |
| 2026 | 160.00 | 130.00 | 142.14 | 134.00 | 100.00 |
| 2027 | 200.00 | 170.00 | 161.43 | 150.00 | 100.00 |
A specimen of the working, so the method is visible.
| Sales, 2027 | 20,00,000 over 10,00,000 times 100 = 200.00 |
| Net profit, 2026 | 1,82,000 over 1,40,000 times 100 = 130.00 |
| Total assets, 2026 | 19,90,000 over 14,00,000 times 100 = 142.14 |
Show one line of working like this in the answer. It proves the method and costs two lines.
The interpretation
Write it in four paragraphs, one for each finding, and name the years.
Sales have doubled and profit has not. Sales stand at 200 in 2027 against a profit of 170. Over the five years the company has grown strongly, but each rupee of sales is bringing in less profit than it did in 2023. The profit margin has fallen, and the arithmetic confirms it: profit was 14 per cent of sales in 2023 and is 11.9 per cent in 2027.
But the fall was arrested in the last year. Between 2023 and 2026 the profit trend lagged the sales trend by a widening gap: 110 against 120, then 120 against 140, then 130 against 160. In 2027 the gap narrows for the first time, profit rising 40 points while sales rose 40. The year 2026 is the turning point, and whatever the company did that year should be looked at, because the deterioration stopped there.
Assets have grown more slowly than sales, and that is favourable. Total assets stand at 161 against sales at 200, so the company is producing more sales from each rupee of assets than it did. Asset utilisation has improved by about a quarter, which partly offsets the fall in margin and is the reason the return on capital employed has held up.
The financing has changed shape without changing size. Long-term liabilities are flat at 100 across all five years, so no new borrowing was taken. Shareholders' funds stand at 150, all of it from profits retained rather than fresh capital. The company has financed its growth out of its own earnings, and it is less geared in 2027 than it was in 2023.
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