Technique index analysis

Method of Index Analysis

In financial analysis, in covering a period of four or five or more years, comparative analysis can create some inconvenience due to the increase in the calculations. To avoid such inconveniences development index is a method of analysis that the long-term trend is expressed by index numbers.

To calculate a series of index numbers should be chosen base year. This base year will have 100 index amount for all reporting feathers. It is customary for the base year to accept the year is average and typical conditions for the existence and development of the company's business. If the earliest year for which data exist, does not meet such a condition, choose another year. All index numbers are calculated by reference to the base year. In practice this analytical method is known as an index of variable composition.

Method Index Analysis

Method of Index Analysis

 Example 1: So, if at the end of basic 2014 year, the company "National Electric Company" EAD - town. Sofia has booked on balance sheet item "Pick clients" in the amount of $40 000 and at the end of   2015 year respectively $50 000, the index number will be equal to 125.

Method Index Analysis

Example 2: In the event that in 2016 year, the balance sheet item has a value $24 000, the index will be 60.

Method Index Analysis

It should be noted that when using the method and index arecalculated index numbers, percentage changes cannot be legible directly, but only after treatment compared to the base year. The refore, the change in balance sheet item "Receivables from clients" between 2014 and 2015 year is 25% (Index 125 - 100 index = 25%). On the other hand, the change between 2016 and 2015 is -65%, and can assume a direct comparison (index 60-125) and was -52%, suggesting calculating the change of 2016 relative to 2015 by reference to the amount of 2015. The percentage change can be calculated through the use of index numbers due consideration to the amount of climate 2016 to 2015.

Method Index Analysis

Summarizing the opportunities offered by the index method for performing financial analysis, it can be noted that:

• Determining the percentage change and the formation of a series of index numbers are based on the use of absolute values of respective items. It is the analyst to adapt the results to changes in the price level. Otherwise index analysis will form some twisted nerve and results.
• The index analysis can generate additional benefits in case the results obtained are consistent with changes in the environment within which the company has functioned. In fact, the more diverse economic conditions are covered by the compared periods, the better the analyst can assess ways in which the company has withstood the adverse and benefited from favorable conditions respectively.
•  Analyzing formed a series of index numbers must be taken into account all the strengths and weaknesses of the method and thus to determine and its field of application. At the level of overall financialstatements is appropriate, changes in the current financial situation to be harmed by using comparative reports stating the change of each balance sheet item of the current compared to the previous year. On the other hand, comparing the series of index numbers do not encounter very serious methodological difficulties in analyzing the dynamics of the feathers of working capital (current assets and current liabilities) over the years.