Session 3: Time-Series Techniques/Trend Analysis

Session Learning Outcomes
Learners will understand and be appreciative on the use of the time series analysis technique while analysing the financial statements information, its application and interpretation

Trend analysis: Is the type of analysis in which the information for a single company is compared over time.
Over the course of the business cycle, sales and profitability may expand and contract, so the ratio analysis for one year may not present an accurate picture of the firm.
Therefore we look at trend analysis of performance over a number of years. However without industry comparisons even trend analysis may not present a complete picture.

By looking at the company profit margin over time in relation to the industrial average it can be observed that a company was showing the decreasing trend up to 1995 after that the company shows an increasing trend. However the company was performing above the average up to 1989 then below the industry average up to 1995.
Trend analysis can be used to compare various other items in the industry/sector such as:

• Number of subscribers
• Investment in fixed assets
• Investment in total assets
• Sales
• Charging rates

Trend analysis can be established by comparing items in the regional area such as:

• Number of telephone operators in Tanzania and average number of operators per country in Sub Saharan Africa
• Charge rates of Botswana mobile subscribers and the average charge rates in the Sub Saharan region over years

Trend analysis can help telecommunication operators enhance their policy making decisions by comparing themselves to other countries and providers in the region. At the same time may seek expertise in the areas which the sector wants to improve if there is a country of comparative benefits as compared to others.

Module 1.4: Learning Activity for Financial Statement Analysis and Interpretation

The following are extracts from the financial statements of a telephone company.

The eight per cent debentures are redeemable in instalments and the final instalment is due to be paid in 2003.

The regulatory authority is concerned about the poor liquidity of the company and has asked you to report on the company’s recent performance. After calculating appropriate ratios, comment on the performance and financial health of the company.