Trend analysis involves comparison of the firm’s performance in a given year with other past years e.g. comparison of liquidity ratios for the past five years. Industrial analysis involves comparison of the firm’s performance in a given year with that of average industrial performance or norm. When carrying out trend and industrial analysis, the following four critical issues must be noted:
1.If a given category of ratios given identify the ratios in this category e.g. when requested to comment on the liquidity position, identify liquidity ratios. If the ratios are given identify the category of the ratios e.g. when requested to comment on times interest earned ration identify it a gearing ratio.
2. State the observation made e.g. incase of industrial analysis, state whether the ratio is higher or lower than the norm, and in case of trend analysis state whether the ratios are declining or improving
3. State the reason for the observation made.
4. State the implications of the observations made e.g. increasing gearing ratios, implies more use of external capital (borrowing) to finance assets of the firm.
Titany answered the question on December 14, 2021 at 07:01
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