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Study in Trends (Trend Analysis)
The examination of any Balance Sheet may be made in two ways:
The study of the structural position as presented by one Balance Sheet. It discloses relationships between assets and liabilities "at rest" at the time when the Balance Sheet was cast.
The study of trends presented by a series of continuous Balance Sheets. It is "dynamic" and essentially prognostications; it foreshows the future by the signs and symptoms of the past.
Any Balance Sheet of an enterprise taken for study is the net resultant position of several transactions. A study in trends involves the breaking up of all factors constituting the past Balance Sheet changes to indicate the direction in which the enterprise is moving.
Is it moving towards greater strength or towards eventual dissolution? Is the expansion really a move towards growth or even if it results in expansion of business does it actually mean its ultimate ruin? These are some of the questions for which answers could be surmise by a study in trends.
Key Aspects of Trend Analysis
The Cost Structure
Usually greater the cost lesser the profit. A consistently falling trend in costs is therefore a favourable feature.
Profitability (ROI)
Measured as a % of sales or capital. A consistent rise indicates greater productivity of funds.
Solvency
The ratio of current assets to current liabilities. An increasing trend indicates ability to meet obligations.
Efficiency
The ratio of production to capital. Higher ratios indicate funds are more productively utilised.
Growth
Recorded by the ratio of increase in net worth and sales in relation to the capital employed.
Sources & Use of Funds
How asset formation has been financed (internal vs external). Helps study Management practices.
* Ratio: Quantitative relationship. Rate: Ratio over time. Percentage: Relationship in hundredths.
Case Study 1: Expansion & Funding
Study of the Balance Sheet of a well known industrial enterprise for the past three years.
View Detailed Analysis & Balance Sheet Data
| LIABILITIES (Rs. in lacs) | 31.12.20 | 31.12.21 | 31.12.22 |
|---|---|---|---|
| Paid-up capital | 817 | 817 | 817 |
| Reserves | 327 | 382 | 581 |
| Long-term borrowings | NIL | 278 | 617 |
| Current liabilities and provisions | 558 | 605 | 561 |
| Total Liabilities | 1702 | 2082 | 2576 |
| ASSETS (Rs. in lacs) | 31.12.20 | 31.12.21 | 31.12.22 |
|---|---|---|---|
| Gross Fixed Assets | 1071 | 1567 | 2235 |
| Less: Depreciation | 528 | 634 | 819 |
| Net Fixed Assets | 543 | 933 | 1416 |
| Current Assets | 1129 | 1119 | 1130 |
| Misc. Assets | 30 | 30 | 30 |
| Total Assets | 1702 | 2082 | 2576 |
Full Professional Inferences:
- 1. The Paid-up capital has remained unchanged at Rs. 817 lacs.
- 2. The reserves have increased from Rs.327 lacs to Rs.581 lacs, indicating good profits ploughed back.
- 3. Gross block increased by Rs. 1164 lacs in 2 years. Financed from sources other than own capital.
- 4. Term borrowings increased from 'nil' to Rs. 617 lacs, showing expansion was partly debt-financed.
- 5. Retained profits increased by Rs. 254 lacs.
- 6. Cash from depreciation (Rs. 291 lacs) remained with the company and was utilised.
- 7. Net inflow from working capital changes was Rs. 2 lacs.
- 8. Total outflow of Rs. 1164 lacs for machinery was financed by: Profits (254) + Depn (291) + LT Borrowing (617) + WC (2).
Case Study 2: Performance Evaluation
Progressive figures of another leading company for five years.
View Detailed Analysis & Balance Sheet Data
| Particulars (Rs. in lacs) | '18 | '19 | '20 | '21 | '22 |
|---|---|---|---|---|---|
| Paid-up capital | 450 | 550 | 550 | 600 | 600 |
| Reserves | 400 | 300 | 250 | 250 | 100 |
| Long-term borrowing | NIL | 150 | 350 | 350 | 315 |
| Short-term borrowing | 120 | 170 | 220 | 250 | 290 |
| Total Liabilities | 1028 | 1245 | 1468 | 1575 | 1470 |
| Net Block | 635 | 735 | 875 | 815 | 775 |
| Current Assets | 358 | 445 | 513 | 680 | 615 |
| Misc. Assets | 35 | 65 | 80 | 80 | 80 |
| Total Assets | 1028 | 1245 | 1468 | 1575 | 1470 |
Full Critical Inferences:
- 1. Paid up capital increased from Rs. 450 lacs to Rs. 600 lacs. Tendency to increase capital noticed.
- 2. Reserves depleted year by year from Rs. 400 lacs to Rs. 100 lacs. Consistent falling trend showing losses.
- 3. Long-term borrowings surged from 'nil' to Rs. 350 lacs, then regressed.
- 4. Total current liabilities jumped by Rs. 277 lacs (178 to 455). This is an outstanding regressive trend.
- 5. Tangible net worth fell from Rs. 850 lacs to Rs. 700 lacs despite fresh capital infusion.
- 6. Performance is erratic despite expansion. Consistent losses occurred between periods.
- 7. Opposite movements in CA/CL (CA falling, CL rising) indicate cash outflow financed by debt.
Conclusion: The TREND IS REGRESSIVE. The expansion was illusory and funded by depletion of strength.
Combined Balance Sheet Analysis
A single Balance Sheet is like the opening chapter of a book. It shows how the capital is distributed at a particular point of time. However, when a series of Balance Sheets are arranged vertically and related items compared, the changes disclose trends.
For example, if expansion is undertaken debt may remain high, and if losses are maintained the net worth declines. The trend - where did the money come from and where did it go - could be ascertainable by these dynamic shifts.
To conclude, a study in trends of Balance Sheet figures helps us to surmise the basic realities beneath the figures and predict future growth.