If you take a look at yourself now and think back to five years ago, do you notice any trends in how you've gotten better with your health, fitness, and money situation? If you can spot a pattern, we might be able to predict what the future holds for you!
Let's talk about the iPhone! Every year, Apple releases new models, which in turn causes the prices of older models to drop. Take the iPhone 12, for example, which was released about three years ago. Its price has been declining since then, making it quite affordable compared to its initial release. We should think about why this is happening. Maybe because there's a newer model out, or people aren't as interested in it anymore, or perhaps they're finding other phones they prefer at that price point. If we look at this trend, we can totally predict that the price is only gonna keep dropping in the future.
If we wear the fortune teller's hat, we can make a friendly prediction about the future price by observing the trend. It seems like the price is most likely going to decrease. We can try to predict its growth just by following this trend.
If we wanna give a name to the analysis we just did, we could call it trend analysis or horizontal analysis. We basically tried to predict what's gonna happen with this product by looking at how it's been doing in the past few years.
Companies conduct horizontal analysis to help them predict what might happen in the future. By looking at past data and trends, they can make informed decisions about what steps to take next.
They use horizontal analysis or trend analysis to spot trends like year on year, month on month, or quarter on quarter. To do this, companies examine financial data from a specific period, usually the past five years. They use this analysis to determine the percentage of change in gross profit, net profit, operating profit, revenue, and more compared to the previous period.
For example, if there is a significant decrease in gross profit compared to last year, they will first try to understand the reason behind it. It could be because the sales have gone down or the cost of sales has increased, and other factors like that. On the other hand, if the operating profit has been consistently increasing, they might use this trend to predict the future. It's almost like how we anticipated the trend of the iPhone.
Horizontal analysis is a great tool to help us understand how much the revenue has changed compared to last year. You can also check if the operating income and net income are going up or down. We can even find out if the interest expense has gone up or down!
Once they have all these numbers, Companies can compare these figures with their peers to determine their performance relative to others. It helps the Companies understand if they are doing better or not.
Vertical and horizontal analysis can be used together to analyze a company. This analysis is helpful when deciding whether to invest in a company.
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