When you review historical financial data, the first thing one should do is look for trends and patterns. If you can identify trends that are occurring and any cyclical patterns that have happened in the past, you can gain important insight into what will happen in the future.
Start with patterns, for example. You can usually best explore patterns by graphing your data. Try several different graphs and really look at each of them to see whether you can recognize any patterns that begin to emerge.
For example, if you randomly pick a set of revenue information without knowing which company they belong to and see a pattern where sales go up in the summer and down in the winter, you can easily determine that the company’s sales follow a cyclical pattern based on the seasons. You can probably even begin to guess what type of company it was, perhaps naming the company without ever being told.
Not all patterns are as obvious or simple as this example, but the basic premise is the same: You’re just looking for any patterns that will allow you to predict what will happen in the future of your corporation’s finances.
Trend is also important. You’re looking for both short-term and long-term trends. Here’s a perfect example. Go look at a graph of the stock market online. Looks pretty jagged, right, with lots of ups and downs? Now zoom out, which increases the time-duration you’re looking at on the graph.
Keep zooming out. Starting to see a bigger trend? Overall, the stock market has been increasing in value relatively smoothly over time. Now that long-term positive trend is made up of short-term upward and downward trends, but overall they’re leading to an increase in value over the course of many decades.
Find trends like this one in all the things you do. Understand how long each short-term trend lasts, try to predict when it will change direction, and figure out what the trends are doing in the long-run.
