Running head: TREND ANALYSIS AND LIMITATIONS 1

Trend Analysis, Limitations and Use in Financial Decisions

Vinh Nguyen

Rasmussen University

FIN6466CBE: Financial Analysis and Decision Making

Dr. Audra Sherwood

Due Date: 03/13/2023

TREND ANALYSIS AND LIMITATIONS

Introduction

JCPenney is a department store chain with its headquarters based in Plano, Texas, United

States. The company was founded in 1902 by James Cash Penney. As of 2021, the company has

667 stores across United States and Puerto Rico (JCPenney). For this report, the aim to is to

conduct 5-year trend analysis on historical data of the company to find out the financial situation

and the exact point when the company took a downfall financially.

Trend Analysis, Limitations, and Use in Making Financial Decisions

Trend analysis is a technique that is used to measure and evaluate the financial

performance of a company over a time period. The time period could be quarters, months or

years. For example: an investor wants to invest in a company however, he is not sure how will

the company perform in future. To gain understanding, the investor collects historical data of the

company for revenue, net profits and other key metrics and conducts a trend analysis. The trend

analysis shows that the company has been showing growth in its key metrics thus based on this

trend the investor concludes the company is likely to perform better in upcoming years as well

and invests in the company.

The major limitation of trend analysis technique is that one trend cannot predict the next

trend (Darmani et al, 2013). Therefore, if revenue showed growth by 2% in past year it cannot be

predicted with surety that revenue in future will also show growth or growth by the same

number. Furthermore, critics say that the markets are efficient which mean there is all

information available. This in turn means that the history will not necessarily repeat itself thus

limiting the use of trend analysis.

The use of trend analysis in financial decision making, despite its limitation, stays

dormant. Trend analysis is significantly used by investors to make decisions about their
TREND ANALYSIS AND LIMITATIONS

investments. Investors analyze past data of companies to make informed decisions if the

company is likely to grow in future. By using trend analysis, investors can minimize their risks

and make careful judgments about whether to hold a security or to sell it.

Financial Trends Based on JCPenney Past Data

Trend Analysis- Revenue Trend Analysis- Revenue

Year Revenue % Change % Change Revenue
2015 12,625 100% 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
2016 12,571 99.6% 12,625
2015
100.0%
2017 12,554 99%
2016 12,571
2018 11,664 92% 99.6%
2019 10,716 85% 2017 12,554
99.4%
2018 11,664
92.4%
2019 10,716
84.9%

Trend Analysis- Net Income

Year Net Income
2015 -513
2016 -17
2017 -118
2018 -255
2019 -268

s
Trend Analysis- Cash Flow Trend Analysis- Cash Flow
Cash %
Year Flows Change % Change Cash Flows
2015 900 100% 0 100 200 300 400 500 600 700 800 900 1000
2016 887 99% 2015 900
100%
2017 458 51% In
2016 887
2018 333 37% 99%
2019 386 43% the 2017 458
51%
2018 333
trend 37%
2019 386
43%
analysis above, 2015 is chosen as

the base year for all three metrics: revenue, net income and cash flows. All of the historical data
TREND ANALYSIS AND LIMITATIONS

is extracted from the latest annual report of JCPenney (JCPenneyAnnualReport, 2020). Based

on the trend analysis above, it can be seen that JCPenney is experiencing a constant decline in its

revenue. The sales have decreased by 15% over the past 5 years which could be the result of

either poor pricing strategy or decrease in items sold. This also shows weakness in the strategy

formulation and poor planning at management’s end. Furthermore, a significant decline can also

be seen in the net income of the company over the past 5 years however, since the base year has

a negative net income the trend analysis will not be meaningful in this situation. However, this

indicates that the expenses of the company were not managed properly with declining profits

which resulted in overall decline in the net income over the years. Another metrics that was

evaluated of JCPenney was cash flows over the past 5 years. The trend analysis shows that there

was a 57% decrease in cash flows over 5 years of JCPenney. This signifies that the company was

not managing its cash flows efficiently. Thus, the trend analysis for the above metrics shows that

financial situation of JCPenney is deteriorating over the past 5-years at an alarming rate.

Forecasting Model

Forecasting Model
Year Annual Growth (forecasted) Revenue

Year 1 10,716
Year 2 7% 11,466
Year 3 7% 12,269
Year 4 7% 13,128
Year 5 7% 14,046

Businesses can use different quantitative forecasting models by looking at company’s

historical and current data to identify patterns and growth. One of the simplest method is the

straight-line method where a fixed percentage is applied to forecast growth in the upcoming
TREND ANALYSIS AND LIMITATIONS

years. This method is used for JCPenney forecasting model. The company is expected to deal

with its financial problems efficiently especially in the metrics identified above through trend

analysis. Therefore, it is forecasted that the JCPenney will experience a fixed 7% increase once

the financial corrections have been catered for in the business.

Financial Weaknesses and Areas of Financial Opportunity

Financial weaknesses are the activities that are causing decline to the financial health of

the business. As per the current analysis of JCPenney over the last 5 years, the major financial

weakness is poor financial management and planning. This is because, if a company experiences

decline in sales in one period, the reasons can be attributed to external factors such as market

conditions. However, JCPenney is experiencing declining revenue, net income and cash flows

constantly over the past 5 years which shows an internal weakness of the firm and that poor

management and financial planning.

Financial opportunities are external factors that can benefit the company if the company

avails those opportunities. In case of JCPenney, financial opportunity would be increasing its

prices for short term to increase revenue. Another financial opportunity can be training the

financial manager and employees on conducting profitable financial planning and handling the

cash flows of the company efficiently.

Recommendation on How to Strengthen the Organization

The main recommendation for JCPenney is to provide training to the finance department,

including manager and employees, on conducting financial planning, budgeting, and devising

careful financial strategies to come out of the loss situation and become profitable again.

Furthermore, the finance department should perform trend analysis and other financial analysis

on past data to evaluate if the company is performing better or worse compared to previous years
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so that informed decision making can be done for future finances of the company. According to

the research, corporate governance should be taught to the top level of the company to improve

their financial conditions (Zayed et al. 2022). Therefore, JCPenney should adopt corporate

governance which encompasses the rules and practices by which companies are governed as this

will further help to strengthen the company.

References

Darmani, A., Dwaikat, N., Ramirez Portilla, A. (2013) Twelve Years of Scholary Research:

Content and Trend Analysis of the Journal Creativity and Innovation Management.

JCPenney. (2021). Locations. Retrieved from https://www.jcpenney.com/locations/index.html.

JCPenneyAnnualReport. (2020). Annual Report. Retrieved from

https://www.annualreports.com/HostedData/AnnualReportArchive/j/NYSE_JCP_2020.pdf

Zayed, N. M., Mohamed, I. S., Islam, K. M. A., Perevozova, I., Nitsenko, V., & Morozova, O.

(2022). Factors Influencing the Financial Situation and Management of Small and Medium

Enterprises. Journal of Risk and Financial Management, 15(12), 554.