Key Difference – Trend Analysis vs Comparative Analysis
Trend and comparative analysis are two main types of analysis methods used to study the performance of the current financial year and plan the upcoming financial year’s budget using financial statements. The key difference between trend analysis and comparative analysis is that trend analysis is a procedure in financial analysis where the amounts in financial statements over a certain period of time is compared line by line in order to make related decisions whereas comparative analysis is the method that compares current year’s financial statement with prior period statements or with the statement of another company.
What is Trend Analysis?
A trend analysis, also referred to as ‘horizontal analysis’, is a procedure in financial analysis in which the amounts of financial information over a certain period of time is compared line by line in order to make related decisions.
E.g. ABC Company’s net profit for the last 5 years is as follows.
Trend analysis involves comparing financial results line by line horizontally. This assists in understanding how the results have changed from one financial period to another. Results in trend analysis can be interpreted in following ways.
- In absolute terms
From 2015 to 2016, net profit has risen by $386m ($4,656m-$4,270m)
- As a percentage
From 2015 to 2016, net profit has increased by 9% ($386m/$4,270m *100)
- In a graphical form
Trend analysis can be depicted in a graph to show the trend line so that it becomes convenient for the decision makers to understand the overall performance of the company at a glance.
What is Comparative Analysis?
Comparative analysis is the method that compares current year’s financial statement with prior period statements or with the statement of another company. Business managers and analysts use the income statement, balance sheet and cash flow statement for comparative purposes. Comparative analysis can be a horizontal analysis or a vertical analysis (method of analysis of financial statements where each line item is listed as a percentage of another item to conduct useful decision making).
The most important aspect of a comparative analysis is the ratio calculation using the information in financial statements. Ratios can be compared with ratios of previous financial year ratios as well as industry standards.
E.g. In industries where many business transactions are conducted on credit, accounts receivable ratio can expected to be higher than the average, however, this is acceptable due to the nature of the industry.
What is the difference between Trend Analysis and Comparative Analysis?
Trend Analysis vs Comparative Analysis
|Trend analysis is a procedure in financial analysis in which the amounts in financial statements over a certain period of time is compared line by line in order to make related decisions.||Comparative analysis is the method that compares current year’s financial statement with prior period statements or with the statement of another company.|
|Type of Analysis|
|Trend analysis is a horizontal analysis.||Comparative analysis can either be a horizontal analysis or a vertical analysis.|
|Trend analysis becomes more useful when comparing company results with previous financial years.||Comparative analysis can be used to compare company results with previous financial periods as well as with other similar companies.|
Summary- Trend Analysis vs Comparative Analysis
The difference between trend analysis and comparative analysis depends on the way financial information in statements are extracted for decision making. Trend analysis compares financial information over time by adopting a line by line method where the management attempts to understand the overall movement in the trend line. Comparative analysis is focused on conducting comparisons of ratios calculated using financial information. Both these methods are conducted using the same financial statements, and both are equally important to make decisions that affect the company on an informed basis Sufficient time should be dedicated for the proper analysis of financial information for effective decision-making.
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