What analysis is used to understand changes in profit margins over time?

The correct answer, which involves horizontal analysis, is appropriate because this method specifically focuses on comparing financial data over a series of periods. By examining the changes in profit margins over time, horizontal analysis enables businesses to identify trends, growth patterns, or declines in performance. This comparison can help stakeholders understand how factors such as revenue fluctuations, cost changes, and market conditions influence profit margins from one period to the next.

Trend analysis, while related to evaluating performance over time, typically looks at longer-term progress and may not specifically focus on financial ratios like profit margins in isolation. Variance analysis concerns the differences between budgeted and actual financial performance, providing insight into efficiency but not directly analyzing profit margins over time. Vertical analysis evaluates financial statements by showing each line item as a percentage of a base figure (such as total sales), which is useful for assessing a single period's performance rather than trends over time. Thus, horizontal analysis is indeed the most fitting choice for understanding changes in profit margins over time.