Contemporary business is all about data and analytics. Thus, to survive in this new world of business, companies, and investors have to embrace a lot of scientific methods that help to make the right decisions. One of these methods is trend analysis, which broadly refers to collecting and analyzing information to reveal patterns. In business, trend analysis shows companies’ growth trends and similar patterns that help investors to determine what is the likely future of the firm. Read more about trend analysis at Coresignal.
Looking at the past to see the future
Trend analysis is used in many different fields to see certain patterns and make deductions based on them. The specific goals of the analysis depend on the field and the case. For example, in some cases, trend analysis is used when there is some missing data about the past, to determine what it probably looks like based on the pattern.
In business, however, trend analysis is most commonly used to make predictions about the future. Investors want to know what the future holds for a specific company before making the investment. Thus, they use the historical data they have to determine the growth trend of the company. The data will show whether the company is moving upward, declining, or stagnating in more or less the same position.
Additionally, trend analysis will show irregularities in the patterns, for example, sudden but short-lived growth. From this information, it can be further deduced what causes the trends to go upward or downward in the case of the company at hand. That way investors and managers are able to determine the strong and weak sides of the company and what can be done with it in order to move it forward.
Five things to know
Trend analysis is a very useful procedure for investors evaluating different companies for investment opportunities. Of course, it is also beneficial for company managers looking to improve decision-making and create sustainable future strategies.
There are a few things worth knowing when aiming to utilize the potential of trend analysis. Here are 5 things to pay attention to.
1) There are three general growth trends that could be recognized: uptrend, downtrend, and sideways or horizontal trend. Naturally, the first two show whether a company is growing by some important metric or declining and are a good sign and a bad sign, respectively. The horizontal trend shows stagnation or stability, that is the company is going steady for some time. From the investor’s point of view, it would be a risky investment as it is not clear why the company is not growing and how much it would take for it to start declining.
2) Trend analysis can be performed for various metrics related to the company. This means that not only the profit or size of the company can be measured but also such metrics as website visits or social media mentions. This means that not only traditional data but all kinds of alternative data can be used for trend analysis. It is always advisable to run the analysis for as many different metrics as possible to get the full picture.
3) There is no singular timeframe set for all trend analyses. This means that the time periods for which the data should be collected for the analysis vary with different kinds of analysis. Even for the same type of analysis, there is no general agreement on how much historical data is enough. Of course, the longer the period analyzed, the more assured one can be that the tendency seen is truly a significant trend.
4) Aside from the utility to investors, trend analysis can be used for various managerial purposes. For example, it can be utilized to check the performance of a new marketing campaign, compare sales of a product by region, or prevent fraud by checking employee expense report trends.
5) Investors use trend analysis not only to research particular companies or investments but also to analyze the entire industry. Trend analysis can reveal where the market is headed, showing the potential of particular products or services. Furthermore, it is easy to compare two or more companies using trend analysis.
As good as the data used
The most general ways to categorize trend analysis in business is by the analysis tools used and the data analyzed. The results of the analysis will mostly depend on these two things.
At the end of the day, the more important of the two is data. Firstly, because the quantity of data will strongly determine how meaningful are the results of the analysis. Secondly, because the quality of it will be crucial to how trustworthy they are. One needs quality data to be sure that the results are good enough to make decisions. Additionally, the high-quality data will ensure that the process of analysis itself runs smoothly and efficiently.