What is Horizontal Analysis?

There’s a wealth of data lurking inside your company’s financial statements—and if you know how to analyze it effectively, you can transform financial information into actionable insights. Two of the most common, and effective, ways to do so are horizontal analysis and vertical analysis. The primary difference between vertical analysis and horizontal analysis is that vertical analysis is focused on the relationships between the numbers in a single reporting period, or one moment in time. Vertical analysis is also known as common size financial statement analysis. The analysis of critical measures of business performance, such as profit margins, inventory turnover, and return on equity, can detect emerging problems and strengths. For example, earnings per share may have been rising because the cost of goods sold has been falling or because sales have been growing steadily.

Therefore, total net sales are the Oral, Personal & Home Care, andPet Nutrition Segment. Financial Modeling And ForecastingFinancial modeling refers to the use of excel-based models to reflect a company’s projected financial performance. Cost Of Goods SoldThe Cost of Goods Sold is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs.

Horizontal Analysis vs. Vertical Analysis: A Powerful Pair of Data Tools

The purpose of vertical analysis is to evaluate the trend of a specific item with an everyday item within the current year. So, for example, when analyzing an income statement, the first line item, sales, will be established as the base value (100%), and all other account balances below it will be expressed as a percentage of that number. It is important for every company to grow their business over time in order to create shareholder value. Thus, horizontal analysis helps to understand how successfully this has been achieved considering a period of time. For example, you could use horizontal analysis to compare a company’s profit margins in one year to its profit margins in another year.

• A financial statement analyst compares income statements or balance sheets for subsequent years to uncover trends or patterns.
• It involves identifying the co-relation of items relating to a company’s financial information and how they affect the overall performance of an organization.
• In vertical analysis, the line of items on a balance sheet can be expressed as a proportion or percentage of total assets, liabilities or equity.
• For example, growth businesses might exhibit signs of growing sales with initially low-profit margins.
• Both these methods are conducted using the same financial statements and both are equally important to make decisions that affect the company on an informed basis.
• There are hundreds of financial ratios employed and even different methods of calculating the same ratios.

The following figure is an example of how to prepare a horizontal analysis for two years. For useful trend analysis, you need to use more years , but this example gives you all the info you horizontal vs vertical analysis need to prepare a horizontal analysis for an unlimited number of years. The comparative statement is then used to highlight any increases or decreases over that specific time frame.

Drawbacks of Horizontal Analysis

This type of analysis can be used to measure changes in individual line items from one period to another. For a horizontal analysis, you compare like accounts to each other over periods of time — for example, accounts receivable (A/R) in 2014 to A/R in 2015. There’s a reason horizontal analysis is often referred to as trend analysis. Looking at and comparing the financial performance of your business from period to period can help you spot positive trends, such as an increase in sales, as well as red flags that need to be addressed. Like horizontal analysis, vertical analysis is used to mine useful insights from your financial statements. It can be applied to the same documents, but is exclusively percentile-based and travels vertically within each period across periods, rather than horizontally across periods.

Ultimately, the way in which you apply a vertical analysis of your accounts to your business will depend on your organisational goals and targets. For calculation of industry average horizontal analysis deals with multiple reporting periods, and vertical analysis only deals with a single reporting period. One of the major criticisms of horizontal analysis is that it can at times produce biased results. This is because the beginning period will determine how the growth and trajectory appear. By selecting a beginning period with particularly inferior performance, analysts can sometimes create the impression that the business is doing better than it is. At the bottom of the analysis, note that net income, as a percentage of sales, declined by 2.62 percentage points (6.67 percent to 4.05 percent).

Difference Between Horizontal Analysis and Vertical Analysis

Further, vertical analysis can also be used for the purpose of benchmarking. Vertical analysis translates figures in financial statements to percentages of a base figure, which has a value of 100%. Using percentages can make the data easier to visualize and understand. In horizontal analysis, you can compare figures from one time period to figures from a base time period to get an overview of changes over time. Analyzing financial trends over periods or years can help you track how a company’s financial state has changed, find patterns in its data and spot potential problems and opportunities. There are multiple forms of financial statement analysis—including variance analysis, liquidity analysis and profitability analysis—but two commonly used types are horizontal and vertical analysis.

Alicia Tuovila is a certified public accountant with 7+ years of experience in financial accounting, with expertise in budget preparation, month and year-end closing, financial statement preparation and review, and financial analysis. She is an expert in personal finance and taxes, and earned her Master of Science in Accounting at University of Central Florida. Horizontal Analysis is undertaken to ascertain how the company performed over the years or what is its financial status, as compared to the prior period.

What is vertical analysis?

The vertical analysis shows the relative sizes of the accounts present within the financial statement. Financial statements should be prepared in a standard vertical format in accordance with accounting standards. The main use of vertical analysis is to calculate the financial ratios which in turn are key metrics in evaluating company performance. Once the ratios are calculated, they can be easily compared with ratios in similar companies for benchmarking purpose.

Financial Analysis is helpful in accurately ascertaining and forecasting future trends and conditions. The primary aim of horizontal analysis is to compare line items in order to ascertain the changes in trend over time. As against, the aim of vertical analysis is to ascertain the proportion of item, in relation to a common item in percentage terms. In Horizontal Financial Analysis, the comparison is made between an item of financial statement, with that of the base year’s corresponding item.

What is Vertical Analysis?

Horizontal analysis – Also known as trend analysis, horizontal analysis of a balance sheet is a financial statement analysis technique that shows changes in the amounts of financial statement items over a period of time. The earliest period is usually used as the base period and the items on the statements for all later periods are compared with the same items on the statements of the base period. Indeed, sometimes companies change the way they break down their business segments to make the horizontal analysis of growth and profitability trends more difficult to detect. Accurate analysis can be affected by one-off events and accounting charges. Financial statement analysis, which is a process of examining a company’s financial statements to develop strategies, is a valuable skill for financial analysts, accountants and other finance professionals.

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Last year is your base year, and let’s say the company’s total assets were $600,000. In your accounts and any growth or decline that may have occurred over set periods of time. By using horizontal analysis, we can now clearly see that Google’s revenue, gross profit, and EBITDA grew faster than Apple’s in every https://online-accounting.net/ year except for 2015 , with 2016 looking particularly rough for Apple. Horizontal analysis, also called time series analysis, focuses on trends and changes in numbers over time. Horizontal allows you to detect growth patterns, cyclicality, etc., and to compare these factors among different companies.

This enables you to easily spot growth trends as well as any red flags that may need to be addressed. Here, the vertical analysis can be used to understand the different proportions of each line item to the whole statement, and hence understand the trends for the current fiscal year. Horizontal analysis can be manipulated to make the current period look better if specific historical periods of poor performance are chosen as a comparison. Now let’s discuss the differences between horizontal and vertical analysis.

Since horizontal analysis is expressed in percentage change over time, it is often confused with vertical analysis. The two are entirely different with the primary difference between them being that horizontal examines the relationship between numbers across various periods and vertical analysis is only concerned with a single period. The process of comparing data points over time obviously requires at least two data sets to be available. You can perform horizontal analysis on any financial statement metric, financial ratio, or financial statement line item.