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Horizontal analysis in a nutshell is the comparison of multiple reporting periods to detect growth and patterns of a company's financials.

The analysis compares previous reportings which are the base year for comparison to the current year.

The changes are typically represented as a percentage change from the base year based on line-by-line comparison.

A company will use the formula (Amount in comparison year-Amount in base year) divided by the amount in base year multiplied by 100 to get their percentage.

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While analyzing financial statements, horizontal analysis is used to analyze historical data from various accounting periods, such as ratios or line items. In a horizontal analysis, comparisons can be done using either absolute comparisons or percentage comparisons. In the latter case, the statistics from each succeeding period are expressed as a percentage of the baseline year's total, with 100% serving as the baseline value. This is also known as base-year analysis.

To understand what has been affecting a company's financial performance over a period of years, investors and analysts can use horizontal analysis to detect trends and growth patterns. Analysts can evaluate relative changes in various line items over time and forecast them into the future using this sort of analysis. A thorough picture of operational outcomes is provided by a time-series analysis of the income statement, balance sheet, and cash flow statement, which exposes what motivates a company's success and if it is profitable and functioning efficiently.

The percentage changes in specific financial statement figures are indicated in the U.S. Selecting the base year and comparative year is the first step in computing the percentage change. Then, divide the result by the base year to arrive at the dollar change by deducting the value from the base year from the comparative year. Next, the outcome is multiplied by 100.
Formula To Calculate Horizontal Analysis Percentage Amount In Comparison Year - Amount In Base Year/Amount In Base Year * 100 Formula To Calculate Horizontal Analysis Dollars Amount In Comparison Year - Amount In Base Year

Used to examine changes in account balances line by line for particular accounting periods

Compares findings from earlier accounting periods with more recent findings

Enables management to make strategic decisions more effectively.

Used to determine a company's concentration in or ties to specific accounts

Account balances are adjusted to proportional percentages.

Is frequently used by creditors or investors to assess the risk and financial characteristics of a company.

When reviewing a company's financial statements over a number of periods, horizontal analysis is utilized.

The most common way to represent it is as a percentage increase over the identical line item in the base year.

Users of financial statements can quickly see trends and growth patterns thanks to horizontal analysis.

A company's growth and financial situation in relation to competitors are displayed via horizontal analysis.

If certain historical eras of underperformance are chosen as a comparison, horizontal analysis can be used to make the current period appear better.

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Horizontal analysis is a financial analysis technique used to evaluate changes in financial data over time, typically comparing data from multiple periods (such as years or quarters) to identify trends, patterns, and changes in performance. By analyzing these changes, businesses can gain insights into their financial performance, identify areas of strength or weakness, and make informed decisions for future planning and strategy.

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A Beginner’s Guide to Horizontal Analysis

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Horizontal analysis compares financial statements to get an in-depth look at financial performance. Here's how horizontal analysis can help you spot key trends.

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This website contained information about horizontal analysis. It's a technique for comparing financial statements over a period of time. In this website they go through the process of how to do an analysis and shows examples and picture set by step. They also show videos and give descriptive details.

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What is Horizontal Analysis?

Horizontal analysis interprets the change in financial statements over two or more accounting periods based on the historical data. It denotes the percentage change in the same line item of the next accounting period compared to the value of the baseline accounting period.

Understanding Horizontal Analysis

Horizontal Analysis is used for evaluating trends year over year (YoY) or quarter over quarter (QoQ). If you are an investor and thinking about investing in a company, only a year-end balance sheet or income statement wouldn't be enough for you to judge how a company is doing. You need to look at a couple of years at least to be sure. Better yet, if you can see many years of balance sheets and income statements and make a comparison among them.

Through horizontal analysis of financial statements, you would be able to see two actual data for consecutive years and would be able to compare each and every item. And on the basis of that, you can forecast the future and understand the trend.

You don't need any special financial skill to ascertain the difference between the previous year's data and last year's data. All you need is diligence, attention to details, and a logical mind to decipher why the change happens.

In this GKSR example above, we are able to identify the YoY growth rate using Horizontal Analysis of Income Statement. It helps us identify potentials areas of growth and concerns.

For example, in GKSR, we note that the provision for income tax has increased by 12.6%; however, revenues have increased by only 5.5%. Why did provisions increase at a higher rate? Also, there has been a comparatively higher growth of 9.1% in Selling and Admin costs. What could have contributed to this increase?

As we see, we are able to correctly identify the trends and also come up with relevant areas to target for further analysis.

Horizontal Analysis Formula

First, we need to take the previous year as the base year and last year as the comparison year. For example, let's say we are comparing between 2015 and 2016; we will take 2015 as the base year and 2016 as the comparison year.
Horizontal Analysis formula = [(Amount in comparison year - Amount in the base year)/ Amount in a base year] x 100
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For eg:
Source: Horizontal Analysis (wallstreetmojo.com)

Horizontal Analysis Example

Let us assume that we are provided with the Income Statement data of company ABC. We need to perform horizontal analysis of the income statement of this company.

(-) Cost of Goods Sold The Cost of Goods Sold (COGS) 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. However, it excludes all the indirect expenses incurred by the company. (COGS)

(21,00,000)

(20,00,000)

100,000

5%

Selling Expenses The amount of money spent by the sales department on selling a product is referred to as selling expenses. This includes expenses incurred on advertising, distribution and marketing. Because it is indirectly related to the production and delivery of goods and services, it is classified as an indirect cost.

220,000

230,000

(10,000)

(4.35%)

Interest expenses Interest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.

(50,000)

(50,000)

§

§

This is a basic example, where we have divided our approach into two parts. First, we found the absolute difference between the comparative years.

Likewise, we can do the same for all the other entries in the Income Statement.

Colgate Horizontal Analysis

Let us now look at the horizontal analysis of Colgate's Income Statement. Here we have the YoY growth rates of Colgate's Income statement from 2008 until 2015. We calculate the growth rate of each of the line items with respect to the previous year.

For example, to find the growth rate of Net Sales of 2015, the formula is (Net Sales 2015 - Net Sales 2014) / Net Sales 2014.

Here are the following observations from Colgate's.

Uses in Financial Modeling

Horizontal Analysis is very useful for Financial Modeling and Forecasting Financial modeling refers to the use of excel-based models to reflect a company's projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact. . The approach used here is fairly simple.

Step 1 - Perform the horizontal analysis of income statement and balance sheet historical data.

Step 2 - Based on the YoY or QoQ growth rates, you can make an assumption about future growth rates.

Let us now look at Colgate 10K 2013 report. We note that in the income statement, Colgate has not provided segmental information; however, as additional information, Colgate has provided some details of segments on Page 87 Source - Colgate 2013 - 10K, Page 86

Since we do not have any further information about the segments, we will project the future sales of Colgate on the basis of this available data. We will use the sales growth approach across segments to derive the forecasts. Please see the below picture. We have calculated the year-over-year growth rate for each segment. Now we can assume a sales growth percentage based on the historical trends and project the revenues under each segment. Total Net sales are the sum total of the Oral, Personal & Home Care, and Pet Nutrition Segment.

Horizontal Analysis Video

Recommended Articles

This article has been a guide to what is horizontal analysis. Here we discuss the formula of horizontal analysis on the income statement and balance sheet along with practical examples. You may go through the following articles for further readings on financial analysis

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Horizontal analysis interprets the change in financial statements over two or more accounting periods based on the historical data. It denotes the percentage change in the same line item of the next accounting period compared to the value of the baseline accounting period.

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Horizontal Analysis is the measurement of a companies financial performance, by comparing two different periods of times. In this link they provide the equation for that in monetary form and percentage, but they also break down what the purpose of horizontal analysis is.

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What is Horizontal Analysis?

Horizontal Analysis measures a company's operating performance by comparing its reported financial statements, i.e. the income statement and balance sheet, to the financial results filed in a base period.

How to Perform Horizontal Analysis (Step-by-Step)

Horizontal analysis, or "time series analysis", is oriented around identifying trends and patterns in the revenue growth profile, profit margins, and/or cyclicality (or seasonality) over a predetermined period.

The accounting period covered could be one-month, a quarter, or a full fiscal year.
Conceptually, the premise of horizontal analysis is that tracking a company's financial performance in real time and comparing those figures to its past performance (and that of industry peers) can be very practical.
Performing horizontal analysis can help determine the prevailing industry tailwinds (or headwinds), the forward-looking growth outlook in the market (e.g. the industry's projected CAGR), and the target customer's spending patterns, and a more in-depth understanding of the company's core performance drivers can thus be identified.

Common Size Analysis of Financial Statements

The findings of common size analysis as compiled in the preliminary stages of due diligence are critical.

In particular, the specific metrics and any notable patterns or trends that were identified can be compared across different companies - ideally to close competitors operating in the same industry - in order to evaluate each finding in more detail.

Per usual, the importance of completing sufficient industry research cannot be overstated here. In each industry, market participants attempt to solve different problems and encounter various obstacles, resulting in financial performance that reflects a given industry's state.

While peer-to-peer comparisons are performed as part of the horizontal analysis process, it is important to consider the external variables that impact operating performance, especially any industry-specific considerations and market conditions.

Profitability by Industry → Certain industries are comprised of high-growth companies where even publicly traded companies are unprofitable or struggling to turn a profit. In order to evaluate the profitability of companies in a specific industry, an average range must first be determined, as well as the factors that positively (or negatively) impact profit margins.

Competitive Landscape → Each industry is characterized by its own competitive dynamics and market leaders (i.e. the companies with the most market share). For instance, some industries are under constant threat of technological disruption, whereas others have far less exposure. The generation of long-term, sustainable profits is a function of possessing an "economic moat", which, to reiterate, is context-specific because no two industries are identical (and neither are the strategies that enabled the market leader to reach its current position).

Growth Profile → Finding profitable growth opportunities in a market is a challenging task in itself, but capitalizing on the opportunity can be even more difficult. With that said, growth is subjective and the maturity of the company must be considered for comparisons to be useful. For example, a company exhibiting low single-digit growth in revenue yet has a track record of long-lasting profitability (i.e. "cash cow") might not be appealing to an investor seeking companies at the forefront of disruptive technologies with consistent double-digit revenue growth. However, the goals of a mature, established company is entirely different from that of an early-stage, high-growth company with a future that is contingent on acquiring as many new users as possible and raising capital from venture capital (VC) or growth equity investors.

Cost Structure → At the end of the day, the reinvestment needs of a company is directly tied to the industry it operates within. For that reason, the amount of capital needed on hand to fund day-to-day working capital needs and capital expenditures (Capex), i.e. the purchase of long-term fixed assets, varies widely across industries. Long story short, the "common size" financial statements are only informative if the companies being compared as similar in nature in terms of the business model, target customer profile, end markets served, etc.

Horizontal Analysis Formula

The formula for conducting horizontal analysis is as follows.
Horizontal Analysis ($ Change) = Comparison Period - Base Period Horizontal Analysis (% Change) = (Comparison Period - Base Period) ÷ Base Period
In order to express the decimal amount in percentage form, the final step is to multiply the result by 100.

Comparison Period to Base Period Percentage Change Example

For example, if a company's current year (2022) revenue is $50 million in 2022 and its revenue in the base period, 2021, was $40 million, the net difference between the two periods is $10 million.

By dividing the net difference by the base figure, the percentage change comes out to 25%.

Horizontal Analysis (%) = $10 million ÷ $40 million = 0.25, or 25%

The base figure is most often pulled from one of the following sources:

1. The earliest period available in a given data set, i.e. the starting point from which progress is tracked.

2. The period prior to the current period, i.e. year-over-year (YoY) growth analysis.

3. The specific period determined by management to be the most insightful frame of reference against which to compare recent performance.

The latter two tend to go hand-in-hand because the most useful benchmark against which to compare recent performance is most often the preceding period.

In contrast, picking the earliest period for the comparison can show the most positive improvement over time, but the usefulness is somewhat limited considering the extent to how much the company has likely grown and changed given the time elapsed (and selecting a comparison period of underperformance can be misleading in portraying recent performance as better than in actuality).

The priority here should be to identify the company's areas of strengths and weaknesses to create an actionable plan to drive value creation and implement operating improvements.

Horizontal Analysis vs. Vertical Analysis

A fundamental part of financial statement analysis is comparing a company's results to its performance in the past and to the average industry benchmark set by comparable peers in the same (or adjacent) industry.

In particular, there are two forms of financial analysis where a company's income statement and its balance sheet is adjusted to be "common size", i.e. the financial data is expressed as percentages of a base figure, which enables comparisons to be closer to "apples to apples".

1. Horizontal Analysis → The comparison of a company's financial data between periods to spot trends (or developments), as well as for peer group benchmarking purposes. Thus, companies of different sizes in terms of total revenue and currently at different stages in their lifecycle can still be compared to obtain useful insights.

2. Vertical Analysis → In vertical analysis, each line item on the income statement is expressed as a percentage of a base figure, which is usually revenue (or sales). On the balance sheet, the same process is completed, but with the base figure typically being total assets.

Vertical analysis expresses each line item on a company's financial statements as a percentage of a base figure, whereas horizontal analysis is more about measuring the percentage change over a specified period.

In other words, vertical analysis can technically be completed with one column of data, but performing horizontal analysis is not practical unless there is enough historical data to have a useful point of reference.

In fact, there must be a bare minimum of at least data from two accounting periods for horizontal analysis to even be plausible.

Still, horizontal and vertical analyses are meant to be complementary and used in conjunction with the other, so the user can obtain the most comprehensive understanding of a company's historical performance and financial state as of the present date.

Horizontal Analysis Calculator - Excel Model Template

We'll now move to a modeling exercise, which you can access by filling out the form below.

Step 1. Income Statement and Balance Sheet Assumptions

Suppose we're tasked with performing horizontal analysis on a company's financial performance from fiscal years ending 2020 to 2021.

We'll start by inputting our historical income statement and balance sheet into an Excel spreadsheet.

The two tables below display the financial assumptions we'll be using here.

Step 2. Horizontal Analysis on Income Statement

Our first task is to evaluate our hypothetical company's income statement.

The first step to performing horizontal analysis is to calculate the net difference - in dollar terms ($) - between the comparable periods.

From 2021 to 2020, we'll take the comparison year (2021) and subtract the corresponding amount recorded in the base year (2020).

Once repeated for each line item, we are left with the following on the right column:

Revenue = +$45 million (45.0%)

COGS = -$20 million (50.0%)

Gross Profit = +25 million (41.7%)

SG&A = -$15 million (60.0%)

R&D = -$5 million (50.0%)

EBIT = + $5 million (20.0%)

Interest Expense = $0 million (0.0%)

EBT = +$5 million (25.0%)

Taxes = -$2 million (25.0%)

Net Income = +$4 million (25.0%)

Step 3. Horizontal Analysis on Balance Sheet

In the final section, we'll perform horizontal analysis on our company's historical balance sheet.

As in the prior step, we must calculate the dollar value of the year-over-year (YoY) variance and then divide the difference by the base year metric.

Cash and Equivalents = +$20 million (25.0%)

Accounts Receivable = +15 million (30.0%)

Inventory = +5 million (12.5%)

Prepaid Expenses = $0 million (0.0%)

Total Current Assets = +$40 million (22.2%)

PP&E, net = +20 million (10.0%)

Total Assets = +$60 million (15.8%)

Accounts Payable = +$15 million (25.0%)

Accrued Expenses = +5 million (14.3%)

Total Current Liabilities = +$20 million (21.1%)

Long-Term Debt = +15 million (17.6%)

Total Liabilities = +$35 million (19.4%)

Total Equity = +$25 million (12.5%)

In conclusion, we're able to compare the year-over-year (YoY) performance of our company from 2020 to 2021.

While the net differential on its own does not provide many practical insights, the fact that the difference is expressed in percentage form facilitates comparisons to the company's base period and to the performance of that of its comparable peers.

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Horizontal Analysis measures a company's operating performance by comparing its reported financial statements, i.e. the income statement and balance sheet, to the financial results filed in a base period. Horizontal analysis, or "time series analysis", is oriented around identifying trends and patterns in the revenue growth profile, profit margins, and/or cyclicality (or seasonality) over a predetermined period.

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Horizontal analysis is where you subtract all the items from one year and subtract the other year. The next part is that you're going to divide the total and then you're going to multiply with 100 to get the percentage. This is where you can get the correct percentage. This shows the difference between each year and the growth from the other years.

link information = https://study.com/academy/lesson/applying-horizontal-analysis-methods.html#:~:text=How%20to%20Do%20Horizontal%20Analysis,to%20get%20the%20percentage%20change.

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Elisabeth Gabriel, author of the post , defines a horizontal analysis as the comparison of financial data from one accounting period, usually a recent year, to a base accounting period, usually a prior year, and used identify trends. Horizontal analysis is used to compare growth trends between business' in similar industries. The article states that horizontal analysis is used in conjunction with other resources like business credit files and company trade references.

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What is horizontal analysis?

-Horizontal analysis compares financial information for a specific accounting period to data from previous periods.

-Analysts use this method to examine historical trends. It helps in the identification of long-term changes and patterns.

-The current year's values are often compared to those of a base year.

-The purpose is to see if specified numbers have increased or decreased.

Key points:

-Base Year: In horizontal analysis, a base year is used for comparison. The current year's data is compared to this base year.

-Growth Assessment: Horizontal analysis determines a company's growth and financial position in relation to competitors by comparing financial statements over multiple reporting periods.

-Financial statements must be consistent and comparable in accordance with generally accepted accounting principles.

-Consistency ensures that the same accounting processes are used year after year, while comparability allows for examination against similar organizations in the industry.

-The key factors for horizontal analysis include return on equity, inventory turnover, and profit margin.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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A horizontal analysis compiles data across several financial reports and condenses it all into a percentage, most times. Analyzing financial data in this way helps to call attention to fluctuations in profit margins, supplies, fluxes in sales, etc. It focuses on information from a certain time period, for example a term or year.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis. Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

Horizontal Analysis FAQs

How Is Horizontal Analysis Performed?

To perform a horizontal analysis:

1. Choose a line item, account balance, or ratio that you want to analyze.

2. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.

3. Calculate thepercentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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Horizontal analysis involves comparing financial data over different accounting periods to identify trends. It helps in understanding whether expenses and revenues are increasing, decreasing, or remaining stable. This analysis is performed by calculating dollar changes and percentage changes from a base period to a target period, which can range from a month to a year.

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Horizontal analysis is a term that is used to describe how to analyze financial statements. Horizontal analysis works by comparing historical data over a period of time. This set period can be over a month, quarter, or a year etc. This method is also used to look at changes in statements over time and analyze them. This method can also make it easier for the user to spot patterns and trends over time. An example of horizontal analysis is comparing accounts receivable for a month to the previous month. Any trends or patterns that arise can then be looked at and analyzed.

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Horizontal analysis is an approach to analyzing financial statements.

It compares historical data, which includes ratios and line items, over a series of accounting periods. The accounting period can be a month, a quarter, or a year.

This method of analysis is also known as trend analysis.

The horizontal method of analysis is used to identify changes in financial statements over time and assess those changes.

A base year is initially selected as a benchmark. Either the data of the rest of the years is expressed as a percentage of the base year or an absolute comparison is performed. The base year comparison is known as base year analysis.

This method of analysis makes it easy for the financial statement user to spot patterns and trends over the years.

An absolute comparison involves comparing the amount of the same line of the item to its amounts in the other accounting periods. For example, comparing the accounts receivables of one year to those of the previous year. Any changes are analyzed then.

In percentage comparison, the increase or decrease in amounts is expressed as a percentage of the amount in the base year.

For example, if the base year amount of cash is $100, a 10% increase would make the current accounting period's amount $110, whereas a 10% decrease would be $90.

Different ratios, such as earnings per share (EPS) or current ratio, are also compared for different accounting periods.

Horizontal Analysis: Explanation

Horizontal analysis focuses on the dollar and percentage changes that occur in specific accounts from year to year.

Determining the percentage change is important because it links the degree of change to the actual amounts involved. In this way, percentage changes are better for comparative purposes with other firms than are actual dollar changes.

For example, a $1 million increase in General Motors' cash balance is likely to represent a much smaller percentage increase than a corresponding $1 million increase in American Motors' cash balance.

To calculate percentage changes, you can use the following formula:
Percentage change = (Amount of dollar change / Base year amount) x 100
The base year is always the first year in the comparison.

For example, suppose that Safeway's total current assets were $1,729,146,000 in 2018 and $1,861,389,000 in 2019. This represents a dollar increase of $132,243,000 and a percentage increase of 7.65%, which is calculated as follows:

Percentage change = ($1,861,389,000 - $1,729,146,000 / 1,729,149,000) x 100 = 7.65%

You can also use horizontal analysis in conjunction with both the balance sheet and the income statement.

In the example shown below, comparative balance sheets and income statements are given for Safeway Stores. The tables show the dollar and percentage changes.

Several interesting balance sheet changes are apparent in the tables below. In 2019, Safeway Stores increased its operating of fixed assets. There were rises of more than 12% in all categories of property other than transport equipment.

This increase in capital expenditures is also reflected on the liability side of the balance sheet. In particular, notes and debentures increased by over 53%.

In this discussion and analysis of operations, Safeway's management noted that the increase was due to a growing trend toward mortgage financing.

Comparative Balance Sheets With Horizontal Analysis

Comparative Income Statements With Horizontal Analysis

Horizontal analysis of income statements also produces worthwhile information.

For example, in Safeway Stores' balance sheets, both sales and the cost of sales increased from 2018 to 2019.

However, the percentage increase in sales was greater than the percentage increase in the cost of sales. This led to an increase in gross profit from 2018 to 2019.

Operating and administrative expenses also increased slightly and interest expense increased by over 12%. This resulted in only a slight increase in net income for 2019 over 2018.

The Usefulness of Horizontal Analysis

Consistency and comparability are generally accepted accounting principles ( GAAP).

Consistency is important when performing horizontal analysis of financial statements. When the same accounting standards are used over the years, the financial statements of the company are easier to compare and trends are easily analyzed.

Comparability means that a company's financial statements can be compared to those of another company in the same industry.

Horizontal analysis enables investors, analysts, and other stakeholders in the company to see how well the company is performing financially.

A company's financial performance over the years is assessed and changes in different line items and ratios are analyzed. Negative changes and trends are further investigated.

Horizontal analysis also makes it easier to detect when a business is underperforming.

For example, if a company starts generating low profits in a particular year, expenses can be analyzed for that year. This makes it easier to spot inefficiencies and specific areas of underperformance.

Ratios such as asset turnover, inventory turnover, and receivables turnover are also important because they help analysts to fully gauge the performance of a business.

For example, a low inventory turnover would imply that sales are low, the company is not selling its inventory, and there is a surplus. This could also be due to poor marketing or excess inventory due to seasonal demand.

Ratios such as earnings per share, return on assets, and return on equity are similarly invaluable. These ratios make problems related to the growth and profitability of a company evident and clear.

Liquidity ratios are needed to check if the company is liquid enough to settle its debts and pay back any liabilities. Horizontal analysis makes it easy to detect these changes and compare growth rates and profitability with other companies in the industry.

Example

Let's take a look at this simple example before we discuss any further. Each item in a financial statement is compared to the base year. In this case, if management compares direct sales between 2007 and 2006 (the base year), it is clear that there is an increase of 3.2%.

This result would be concerning for the company's management. They would investigate this if they expected at least a 10% increase.

To provide another example, consider an investor who is seeking to invest and finds company C. Company C's figures for the previous year are as follows: net income $2m and retained earnings $10m.

The current year's details are the following: net income $4m and retained earnings $12m. Net income has grown by 100% and retained earnings have increased by only 20%.

The investor now needs to make a decision based on their analysis of the figures, as well as a comparison to other similar figures.

Criticisms of Horizontal Analysis

Regardless of how useful trend analysis may be, it is regularly criticized.

One reason is that analysts can choose a base year where the company's performance was poor and base their analysis on it. In this way, the current accounting period (or any other accounting period) can be made to appear better.

Another problem with horizontal analysis is that some companies change the way they present information in their financial statements. This can create difficulties in detecting troublesome areas, making it hard to spot changes in trends.

Horizontal Analysis: Discussion

To conclude, it is always worth performing horizontal analysis, but it should never be relied upon too heavily. Other factors should also be considered, and only then should a decision be made.

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Horizontal Analysis of Financial Statements | Definition and Examples

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Horizontal analysis is an approach to analyzing financial statements . It compares historical data, which includes ratios and line items, over a series of accounting periods. The accounting period can be a month, a quarter, or a year. This method of analysis is also known as trend analysis.

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This article contains information about both horizontal analysis and vertical analysis. We are currently working on horizontal analysis, so I did not summarize the part of the article containing information about vertical analysis.

The method of financial statement analysis, known as horizontal analysis, involves comparing historical data, such as ratios or line items, over multiple accounting periods. This analysis helps detect trends and growth patterns and shows the percentage growth of the same line item in the base year. In addition, it allows one to compare a company's growth and financial position to its competitors. However, it is essential to be aware that horizontal analysis can sometimes be manipulated to make the current period appear better by comparing it to periods of poor performance.

By examining important business performance indicators like profit margins, inventory turnover, and return on equity, it is possible to identify emerging strengths and problems. Furthermore, coverage ratios such as the cash flow-to-debt and interest coverage ratios can provide insight into a company's ability to service its debt through sufficient liquidity and whether or not this ability is increasing or decreasing.

Horizontal analysis is also helpful in comparing growth rates and profitability across multiple companies in the same industry. To perform a horizontal analysis, you must gather financial information, determine the appropriate comparison methods, and identify relevant trends and patterns.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily.

Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

How to Perform a Horizontal Analysis

A horizontal analysis is performed by following the three primary steps.

Step 1: Gather Financial Information

To perform a horizontal analysis, you must first gather financial information of a single entity across periods of time. Most horizontal analysis entail pulling quarterly or annual financial statements, though specific account balances can be pulled if you're looking for a specific type of analysis.

Be mindful that the gaps between each financial statement are consistent. You can choose whatever interval (month-over-month, year-over-year, etc.), but each iterative financial statement should be equal distance away regarding when it was issued compared to other bits of financial information.

Step 2: Determine Comparison Methods

With the financial information in hand, it's time to decide how to analyze the information. There are several primary comparison methods.

First, a direction comparison simply looks at the results from one period and comparing it to another. For example, the total company-wide revenue last quarter might have been $75 million, while the total company-wide revenue this quarter might be $85 million. This type of comparison is most often used to spot high-level, easily identifiable differences.

Second, a variance analysis determines not only the dollar amount but the direction of change for a given general ledger account. As opposed to simply identifying the difference between two numbers, variance analysis strives to determine the company's financial health by identifying directional changes, frequency of directions, or how each financial result compared against an internal target (i.e. a budget).

Last, a horizontal analysis can encompass calculating percentage changes from one period to the next. As a company grows, it often becomes more difficult to sustain the same rate of growth, even if the company grows in pure dollar size. This percentage method is most useful when identifying changes over a longer period of time where there may be significant deviations from the base period to the current period.

Step 3: Identify Trends and Patterns

With different bits of calculated information now embedded into the financial statements, it's time to analyze the results. The identification of trends and patterns is driven by asking specific, guided questions. For example, upper management may ask "how well did each geographical region manage COGS over the past four quarters?". This type of question guides itself to selecting certain horizontal analysis methods and specific trends or patterns to seek out.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis.

Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts.

For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million.

In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year.

Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

When Can Horizontal Analysis Be Used?

Horizontal analysis is most useful when an entity has been established, has strong record-keeping capabilities, and has traceable bits of historical information that can be dug into for more information as needed. This type of analysis is more specific relevant for analyzing the value we maybe selling or acquiring.

The Bottom Line

Horizontal analysis is a financial analysis technique used to evaluate a company's performance over time. By comparing prior-period financial results with more current financial results, a company is better able to spot the direction of change in account balances and the magnitude in which that change has occurred.

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Horizontal Analysis: What It Is vs. Vertical Analysis

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios or line items, over a number of accounting periods.

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Horizontal analysis, also known as trend analysis, is a financial analysis technique that involves comparing historical financial data over a series of reporting periods to identify trends, patterns, and changes in key financial metrics. To perform a horizontal analysis of financial information, start by selecting a base period and comparing each line item's percentage change from that base period to subsequent periods.

https://oer.pressbooks.pub/utsaccounting1/chapter/horizontal-and-vertical-analysis/

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Horizontal Analysis, also known as time series analysis, is a valuable technique for comparing financial statements over different periods. It helps identify trends, patterns, and changes in a company’s performance. Let’s dive into how to perform a Horizontal Analysis step by step:

1. Select Relevant Financial Statements:

Begin by choosing the financial statements you want to analyze. Typically, you’ll focus on the income statement and balance sheet. Consider which statements provide the most meaningful insights based on your analysis goals.

2. Gather Financial Information:

Collect financial data for a single entity across multiple time periods (e.g., monthly, quarterly, or annually).

3. Comparison Methods:

Decide how you’ll compare the information:

Dollar Amount Analysis: Compare absolute changes in financial data over the periods.

Percentage Analysis: Calculate percentage changes in financial data over the periods.

4. Formulas for Horizontal Analysis:

To standardize the output for comparability, use the following formulas:

Horizontal Analysis ($ Change):

(\text{Comparison Period} - \text{Base Period})

Horizontal Analysis (% Change):

(\frac{\text{Comparison Period} - \text{Base Period}}{\text{Base Period}})

5. Identify Trends and Patterns:

Analyze the results to spot trends, growth, or declines in specific line items. Look for insights that can inform decision-making and strategic planning.

Remember, horizontal analysis provides a snapshot of a company’s performance over time, allowing you to assess its trajectory and make informed business decisions. 📈🔍

For more detailed examples and practical applications, you can explore educational videos on platforms like YouTube:

Horizontal Analysis Tutorial (WallStreetMojo)

Financial Statements Analysis (ActCountAnt Accounting and Investing Tutorials)

Understanding Financial Trends (Edspira)

Happy analyzing! 📊💡

Learn more

1youtube.com2youtube.com3youtube.com4wallstreetprep.com

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https://www.fool.com/the-ascent/small-business/accounting/articles/horizontal-analysis/

I could not decide on just one article. I felt that both of these articles are very helpful in understanding Horizontal Analysis and both explain what they are and how the formulas work.

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What is Horizontal Analysis?

Horizontal Analysis measures a company's operating performance by comparing its reported financial statements, i.e. the income statement and balance sheet, to the financial results filed in a base period.

How to Perform Horizontal Analysis (Step-by-Step)

Horizontal analysis, or "time series analysis", is oriented around identifying trends and patterns in the revenue growth profile, profit margins, and/or cyclicality (or seasonality) over a predetermined period.

The accounting period covered could be one-month, a quarter, or a full fiscal year.
Conceptually, the premise of horizontal analysis is that tracking a company's financial performance in real time and comparing those figures to its past performance (and that of industry peers) can be very practical.
Performing horizontal analysis can help determine the prevailing industry tailwinds (or headwinds), the forward-looking growth outlook in the market (e.g. the industry's projected CAGR), and the target customer's spending patterns, and a more in-depth understanding of the company's core performance drivers can thus be identified.

Common Size Analysis of Financial Statements

The findings of common size analysis as compiled in the preliminary stages of due diligence are critical.

In particular, the specific metrics and any notable patterns or trends that were identified can be compared across different companies - ideally to close competitors operating in the same industry - in order to evaluate each finding in more detail.

Per usual, the importance of completing sufficient industry research cannot be overstated here. In each industry, market participants attempt to solve different problems and encounter various obstacles, resulting in financial performance that reflects a given industry's state.

While peer-to-peer comparisons are performed as part of the horizontal analysis process, it is important to consider the external variables that impact operating performance, especially any industry-specific considerations and market conditions.

Profitability by Industry → Certain industries are comprised of high-growth companies where even publicly traded companies are unprofitable or struggling to turn a profit. In order to evaluate the profitability of companies in a specific industry, an average range must first be determined, as well as the factors that positively (or negatively) impact profit margins.

Competitive Landscape → Each industry is characterized by its own competitive dynamics and market leaders (i.e. the companies with the most market share). For instance, some industries are under constant threat of technological disruption, whereas others have far less exposure. The generation of long-term, sustainable profits is a function of possessing an "economic moat", which, to reiterate, is context-specific because no two industries are identical (and neither are the strategies that enabled the market leader to reach its current position).

Growth Profile → Finding profitable growth opportunities in a market is a challenging task in itself, but capitalizing on the opportunity can be even more difficult. With that said, growth is subjective and the maturity of the company must be considered for comparisons to be useful. For example, a company exhibiting low single-digit growth in revenue yet has a track record of long-lasting profitability (i.e. "cash cow") might not be appealing to an investor seeking companies at the forefront of disruptive technologies with consistent double-digit revenue growth. However, the goals of a mature, established company is entirely different from that of an early-stage, high-growth company with a future that is contingent on acquiring as many new users as possible and raising capital from venture capital (VC) or growth equity investors.

Cost Structure → At the end of the day, the reinvestment needs of a company is directly tied to the industry it operates within. For that reason, the amount of capital needed on hand to fund day-to-day working capital needs and capital expenditures (Capex), i.e. the purchase of long-term fixed assets, varies widely across industries. Long story short, the "common size" financial statements are only informative if the companies being compared as similar in nature in terms of the business model, target customer profile, end markets served, etc.

Horizontal Analysis Formula

The formula for conducting horizontal analysis is as follows.
Horizontal Analysis ($ Change) = Comparison Period - Base Period Horizontal Analysis (% Change) = (Comparison Period - Base Period) ÷ Base Period
In order to express the decimal amount in percentage form, the final step is to multiply the result by 100.

Comparison Period to Base Period Percentage Change Example

For example, if a company's current year (2022) revenue is $50 million in 2022 and its revenue in the base period, 2021, was $40 million, the net difference between the two periods is $10 million.

By dividing the net difference by the base figure, the percentage change comes out to 25%.

Horizontal Analysis (%) = $10 million ÷ $40 million = 0.25, or 25%

The base figure is most often pulled from one of the following sources:

1. The earliest period available in a given data set, i.e. the starting point from which progress is tracked.

2. The period prior to the current period, i.e. year-over-year (YoY) growth analysis.

3. The specific period determined by management to be the most insightful frame of reference against which to compare recent performance.

The latter two tend to go hand-in-hand because the most useful benchmark against which to compare recent performance is most often the preceding period.

In contrast, picking the earliest period for the comparison can show the most positive improvement over time, but the usefulness is somewhat limited considering the extent to how much the company has likely grown and changed given the time elapsed (and selecting a comparison period of underperformance can be misleading in portraying recent performance as better than in actuality).

The priority here should be to identify the company's areas of strengths and weaknesses to create an actionable plan to drive value creation and implement operating improvements.

Horizontal Analysis vs. Vertical Analysis

A fundamental part of financial statement analysis is comparing a company's results to its performance in the past and to the average industry benchmark set by comparable peers in the same (or adjacent) industry.

In particular, there are two forms of financial analysis where a company's income statement and its balance sheet is adjusted to be "common size", i.e. the financial data is expressed as percentages of a base figure, which enables comparisons to be closer to "apples to apples".

1. Horizontal Analysis → The comparison of a company's financial data between periods to spot trends (or developments), as well as for peer group benchmarking purposes. Thus, companies of different sizes in terms of total revenue and currently at different stages in their lifecycle can still be compared to obtain useful insights.

2. Vertical Analysis → In vertical analysis, each line item on the income statement is expressed as a percentage of a base figure, which is usually revenue (or sales). On the balance sheet, the same process is completed, but with the base figure typically being total assets.

Vertical analysis expresses each line item on a company's financial statements as a percentage of a base figure, whereas horizontal analysis is more about measuring the percentage change over a specified period.

In other words, vertical analysis can technically be completed with one column of data, but performing horizontal analysis is not practical unless there is enough historical data to have a useful point of reference.

In fact, there must be a bare minimum of at least data from two accounting periods for horizontal analysis to even be plausible.

Still, horizontal and vertical analyses are meant to be complementary and used in conjunction with the other, so the user can obtain the most comprehensive understanding of a company's historical performance and financial state as of the present date.

Horizontal Analysis Calculator - Excel Model Template

We'll now move to a modeling exercise, which you can access by filling out the form below.

Step 1. Income Statement and Balance Sheet Assumptions

Suppose we're tasked with performing horizontal analysis on a company's financial performance from fiscal years ending 2020 to 2021.

We'll start by inputting our historical income statement and balance sheet into an Excel spreadsheet.

The two tables below display the financial assumptions we'll be using here.

Step 2. Horizontal Analysis on Income Statement

Our first task is to evaluate our hypothetical company's income statement.

The first step to performing horizontal analysis is to calculate the net difference - in dollar terms ($) - between the comparable periods.

From 2021 to 2020, we'll take the comparison year (2021) and subtract the corresponding amount recorded in the base year (2020).

Once repeated for each line item, we are left with the following on the right column:

Revenue = +$45 million (45.0%)

COGS = -$20 million (50.0%)

Gross Profit = +25 million (41.7%)

SG&A = -$15 million (60.0%)

R&D = -$5 million (50.0%)

EBIT = + $5 million (20.0%)

Interest Expense = $0 million (0.0%)

EBT = +$5 million (25.0%)

Taxes = -$2 million (25.0%)

Net Income = +$4 million (25.0%)

Step 3. Horizontal Analysis on Balance Sheet

In the final section, we'll perform horizontal analysis on our company's historical balance sheet.

As in the prior step, we must calculate the dollar value of the year-over-year (YoY) variance and then divide the difference by the base year metric.

Cash and Equivalents = +$20 million (25.0%)

Accounts Receivable = +15 million (30.0%)

Inventory = +5 million (12.5%)

Prepaid Expenses = $0 million (0.0%)

Total Current Assets = +$40 million (22.2%)

PP&E, net = +20 million (10.0%)

Total Assets = +$60 million (15.8%)

Accounts Payable = +$15 million (25.0%)

Accrued Expenses = +5 million (14.3%)

Total Current Liabilities = +$20 million (21.1%)

Long-Term Debt = +15 million (17.6%)

Total Liabilities = +$35 million (19.4%)

Total Equity = +$25 million (12.5%)

In conclusion, we're able to compare the year-over-year (YoY) performance of our company from 2020 to 2021.

While the net differential on its own does not provide many practical insights, the fact that the difference is expressed in percentage form facilitates comparisons to the company's base period and to the performance of that of its comparable peers.

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Horizontal Analysis measures a company's operating performance by comparing its reported financial statements, i.e. the income statement and balance sheet, to the financial results filed in a base period. Horizontal analysis, or "time series analysis", is oriented around identifying trends and patterns in the revenue growth profile, profit margins, and/or cyclicality (or seasonality) over a predetermined period.

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A beginner's guide to horizontal analysis is why I chose the fool.com link. The article explained what a horizontal analysis is. A financial analysis technique used to spot trends and compare financial data. It provides a step by step guide in performing one. It's a simple line by line comparison. It will identify patterns, trends, and changes in financial information over a specified time period. A horizontal analysis can be used in decision making process like investing decisions, or financial planning. The link is as follows; https://www.fool.com/the-ascent/small-business/accounting/articles/horizontal-analysis/

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A Beginner’s Guide to Horizontal Analysis

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Horizontal analysis compares financial statements to get an in-depth look at financial performance. Here's how horizontal analysis can help you spot key trends.

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This article shows information about horizontal analysis. Horizontal analysis is used to analyze a company's performance over time and comparing the financial statements from other periods. The key metrics in horizontal analysis are balance sheets, cash flow statements, and income statements. Exploring coverage ratios, interest coverage ratio, and cash flow-to-debt ratio, the horizontal analysis is able to determine if sufficient liquidity can service a company. The formula of horizontal analysis is:

Horizontal Analysis (%) = Amount in Comparison Year - Amount in Base Year / Amount in Base Year * 100

The example from the source:

"[($25 million – $15 million) / $15 million] x 100 = 66%

On the other hand, the company’s retained earnings grew by:

[($67 million – $65 million) / $65 million] x 100 = 3.07%"

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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The article goes into detail about information of a horizontal analysis. A horizontal analysis is used to evaluate a company's performance over time by comparing prior financial results. It helps determine a company's position financially over the competitors. It measure current years values against base years.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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I found this website to be the most informational. Here are some things I learned from reading this article:

Horizontal Analysis is used to analyze financial statements by comparing specific financial information for a certain accounting period with information in other periods. They use this approach to analyze any historical trends.

This can help determine a companies' growth and financial position vs. competitors.

There are a few drawbacks using this, one of them being depending on the choice of the base year and the chosen accounting periods of when the analysis starts.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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This article details the information about the horizontal analysis document and what it is used for. This document is the comparison of financial history over different reporting time frames. This document helps determine a company's position financially over the competitors. When determining growth, a base year is used to compare figures to determine the growth of a company financially.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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This article goes into detail about the information of a Horizontal analysis. A Horizontal Analysis is a financial analysis used to evaluate a company's performance over time by comparing prior financial results. It helps determine a companies growth/financial position versus competitors. They are also used to analyze historical trends which are measured by comparing current years values against base years.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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Horizontal Analysis is used to evaluate the financial performance of a company over an extended period of time. Using a horizontal analysis, a company is able to see the changes, growth, or decline of things such as revenue and operating income. A horizontal analysis can skewed to show positive or negative results, depending on the company's performance in the base year of the analysis.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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I found this website to be interesting and here are some facts about it.

Horizontal Analysis Summary:

It gives you the horizontal formula.

Break down the impact of operating performances, such as probability, competition, growth, and cost structure.

Comparison between vertical analysis

Examples on the balance sheet, and income statement and calculations.

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What is Horizontal Analysis?

Horizontal Analysis measures a company's operating performance by comparing its reported financial statements, i.e. the income statement and balance sheet, to the financial results filed in a base period.

How to Perform Horizontal Analysis (Step-by-Step)

Horizontal analysis, or "time series analysis", is oriented around identifying trends and patterns in the revenue growth profile, profit margins, and/or cyclicality (or seasonality) over a predetermined period.

The accounting period covered could be one-month, a quarter, or a full fiscal year.
Conceptually, the premise of horizontal analysis is that tracking a company's financial performance in real time and comparing those figures to its past performance (and that of industry peers) can be very practical.
Performing horizontal analysis can help determine the prevailing industry tailwinds (or headwinds), the forward-looking growth outlook in the market (e.g. the industry's projected CAGR), and the target customer's spending patterns, and a more in-depth understanding of the company's core performance drivers can thus be identified.

Common Size Analysis of Financial Statements

The findings of common size analysis as compiled in the preliminary stages of due diligence are critical.

In particular, the specific metrics and any notable patterns or trends that were identified can be compared across different companies - ideally to close competitors operating in the same industry - in order to evaluate each finding in more detail.

Per usual, the importance of completing sufficient industry research cannot be overstated here. In each industry, market participants attempt to solve different problems and encounter various obstacles, resulting in financial performance that reflects a given industry's state.

While peer-to-peer comparisons are performed as part of the horizontal analysis process, it is important to consider the external variables that impact operating performance, especially any industry-specific considerations and market conditions.

Profitability by Industry → Certain industries are comprised of high-growth companies where even publicly traded companies are unprofitable or struggling to turn a profit. In order to evaluate the profitability of companies in a specific industry, an average range must first be determined, as well as the factors that positively (or negatively) impact profit margins.

Competitive Landscape → Each industry is characterized by its own competitive dynamics and market leaders (i.e. the companies with the most market share). For instance, some industries are under constant threat of technological disruption, whereas others have far less exposure. The generation of long-term, sustainable profits is a function of possessing an "economic moat", which, to reiterate, is context-specific because no two industries are identical (and neither are the strategies that enabled the market leader to reach its current position).

Growth Profile → Finding profitable growth opportunities in a market is a challenging task in itself, but capitalizing on the opportunity can be even more difficult. With that said, growth is subjective and the maturity of the company must be considered for comparisons to be useful. For example, a company exhibiting low single-digit growth in revenue yet has a track record of long-lasting profitability (i.e. "cash cow") might not be appealing to an investor seeking companies at the forefront of disruptive technologies with consistent double-digit revenue growth. However, the goals of a mature, established company is entirely different from that of an early-stage, high-growth company with a future that is contingent on acquiring as many new users as possible and raising capital from venture capital (VC) or growth equity investors.

Cost Structure → At the end of the day, the reinvestment needs of a company is directly tied to the industry it operates within. For that reason, the amount of capital needed on hand to fund day-to-day working capital needs and capital expenditures (Capex), i.e. the purchase of long-term fixed assets, varies widely across industries. Long story short, the "common size" financial statements are only informative if the companies being compared as similar in nature in terms of the business model, target customer profile, end markets served, etc.

Horizontal Analysis Formula

The formula for conducting horizontal analysis is as follows.
Horizontal Analysis ($ Change) = Comparison Period - Base Period Horizontal Analysis (% Change) = (Comparison Period - Base Period) ÷ Base Period
In order to express the decimal amount in percentage form, the final step is to multiply the result by 100.

Comparison Period to Base Period Percentage Change Example

For example, if a company's current year (2022) revenue is $50 million in 2022 and its revenue in the base period, 2021, was $40 million, the net difference between the two periods is $10 million.

By dividing the net difference by the base figure, the percentage change comes out to 25%.

Horizontal Analysis (%) = $10 million ÷ $40 million = 0.25, or 25%

The base figure is most often pulled from one of the following sources:

1. The earliest period available in a given data set, i.e. the starting point from which progress is tracked.

2. The period prior to the current period, i.e. year-over-year (YoY) growth analysis.

3. The specific period determined by management to be the most insightful frame of reference against which to compare recent performance.

The latter two tend to go hand-in-hand because the most useful benchmark against which to compare recent performance is most often the preceding period.

In contrast, picking the earliest period for the comparison can show the most positive improvement over time, but the usefulness is somewhat limited considering the extent to how much the company has likely grown and changed given the time elapsed (and selecting a comparison period of underperformance can be misleading in portraying recent performance as better than in actuality).

The priority here should be to identify the company's areas of strengths and weaknesses to create an actionable plan to drive value creation and implement operating improvements.

Horizontal Analysis vs. Vertical Analysis

A fundamental part of financial statement analysis is comparing a company's results to its performance in the past and to the average industry benchmark set by comparable peers in the same (or adjacent) industry.

In particular, there are two forms of financial analysis where a company's income statement and its balance sheet is adjusted to be "common size", i.e. the financial data is expressed as percentages of a base figure, which enables comparisons to be closer to "apples to apples".

1. Horizontal Analysis → The comparison of a company's financial data between periods to spot trends (or developments), as well as for peer group benchmarking purposes. Thus, companies of different sizes in terms of total revenue and currently at different stages in their lifecycle can still be compared to obtain useful insights.

2. Vertical Analysis → In vertical analysis, each line item on the income statement is expressed as a percentage of a base figure, which is usually revenue (or sales). On the balance sheet, the same process is completed, but with the base figure typically being total assets.

Vertical analysis expresses each line item on a company's financial statements as a percentage of a base figure, whereas horizontal analysis is more about measuring the percentage change over a specified period.

In other words, vertical analysis can technically be completed with one column of data, but performing horizontal analysis is not practical unless there is enough historical data to have a useful point of reference.

In fact, there must be a bare minimum of at least data from two accounting periods for horizontal analysis to even be plausible.

Still, horizontal and vertical analyses are meant to be complementary and used in conjunction with the other, so the user can obtain the most comprehensive understanding of a company's historical performance and financial state as of the present date.

Horizontal Analysis Calculator - Excel Model Template

We'll now move to a modeling exercise, which you can access by filling out the form below.

Step 1. Income Statement and Balance Sheet Assumptions

Suppose we're tasked with performing horizontal analysis on a company's financial performance from fiscal years ending 2020 to 2021.

We'll start by inputting our historical income statement and balance sheet into an Excel spreadsheet.

The two tables below display the financial assumptions we'll be using here.

Step 2. Horizontal Analysis on Income Statement

Our first task is to evaluate our hypothetical company's income statement.

The first step to performing horizontal analysis is to calculate the net difference - in dollar terms ($) - between the comparable periods.

From 2021 to 2020, we'll take the comparison year (2021) and subtract the corresponding amount recorded in the base year (2020).

Once repeated for each line item, we are left with the following on the right column:

Revenue = +$45 million (45.0%)

COGS = -$20 million (50.0%)

Gross Profit = +25 million (41.7%)

SG&A = -$15 million (60.0%)

R&D = -$5 million (50.0%)

EBIT = + $5 million (20.0%)

Interest Expense = $0 million (0.0%)

EBT = +$5 million (25.0%)

Taxes = -$2 million (25.0%)

Net Income = +$4 million (25.0%)

Step 3. Horizontal Analysis on Balance Sheet

In the final section, we'll perform horizontal analysis on our company's historical balance sheet.

As in the prior step, we must calculate the dollar value of the year-over-year (YoY) variance and then divide the difference by the base year metric.

Cash and Equivalents = +$20 million (25.0%)

Accounts Receivable = +15 million (30.0%)

Inventory = +5 million (12.5%)

Prepaid Expenses = $0 million (0.0%)

Total Current Assets = +$40 million (22.2%)

PP&E, net = +20 million (10.0%)

Total Assets = +$60 million (15.8%)

Accounts Payable = +$15 million (25.0%)

Accrued Expenses = +5 million (14.3%)

Total Current Liabilities = +$20 million (21.1%)

Long-Term Debt = +15 million (17.6%)

Total Liabilities = +$35 million (19.4%)

Total Equity = +$25 million (12.5%)

In conclusion, we're able to compare the year-over-year (YoY) performance of our company from 2020 to 2021.

While the net differential on its own does not provide many practical insights, the fact that the difference is expressed in percentage form facilitates comparisons to the company's base period and to the performance of that of its comparable peers.

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Horizontal Analysis measures a company's operating performance by comparing its reported financial statements, i.e. the income statement and balance sheet, to the financial results filed in a base period. Horizontal analysis, or "time series analysis", is oriented around identifying trends and patterns in the revenue growth profile, profit margins, and/or cyclicality (or seasonality) over a predetermined period.

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This article goes into great detail about comparing historical data over many many years. A couple of the key takeaways was how horizontal analysis is used in the review of a company's financial statements over multiple periods. It is usually depicted as percentage growth over the same line item in the base year. Horizontal analysis shows a company's growth and financial position versus competitors but can be manipulated to make the current period look better if specific historical periods of poor performance are chosen as a comparison.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis. Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

Horizontal Analysis FAQs

How Is Horizontal Analysis Performed?

To perform a horizontal analysis:

1. Choose a line item, account balance, or ratio that you want to analyze.

2. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.

3. Calculate thepercentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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I found this website very good in providing accurate and well summarized information.

Horizontal Analysis in Summary:

Horizontal analysis is the comparison of historical financial information over various reporting periods.

It helps determine a companies’ growth and financial position versus  competitors.

The horizontal analysis technique uses a base year and a comparison year to determine a company’s growth

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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Horizontal Analysis - Stephanie Manley Lawler 

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Horizontal Analysis - Stephanie Manley Lawler 

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https://www.investopedia.com/terms/h/horizontalanalysis.asphttps://www.investopedia.com/terms/h/horizontalanalysis.asp

Horizontal analysis allows investors to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. It helps measure business performance over a period of time.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis. Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

Horizontal Analysis FAQs

How Is Horizontal Analysis Performed?

To perform a horizontal analysis:

1. Choose a line item, account balance, or ratio that you want to analyze.

2. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.

3. Calculate thepercentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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I found this video on horizontal analysis its show how to compare financial information from different years to find a trend. It also does a good job explaining how to find the percentages. It gives good examples on how to read the number and why they might have increased or decreased. It helps when you see someone break it down and do it on video to help understand the concept.

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Horizontal analysis involves comparisons of financial ratios and a benchmark. This article explains different ways how to find this information. Horizontal analysis can be performed by absolute comparison or percentage comparison.

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Horizontal analysis of financial statements involves comparison of a financial ratio, a benchmark, or a line item over a number of accounting periods. This method of analysis is also known as trend analysis. Horizontal analysis allows the assessment of relative changes in different items over time. It also indicates the behavior of revenues, expenses, and other line items of financial statements over the course of time.

Accounting periods can be two or more than two periods. Accounting period can be a month, a quarter or a year. It will depend on the analyst's discretion when choosing an appropriate number of accounting periods. During the investment appraisal, the number of accounting periods for analysis is based on the time horizon under consideration.

Horizontal analysis of financial statements can be performed on any of the item in the income statement, balance sheet and statement of cash flows. For example, this analysis can be performed on revenues, cost of sales, expenses, assets, cash, equity and liabilities. It can also be performed on ratios such as earnings per share (EPS), price earning ratio, dividend payout, and other similar ratio.

Horizontal analysis can be performed in one of the following two different methods i.e. absolute comparison or percentage comparison.

One way of performing horizontal analysis is comparing the absolute currency amounts of some items over the period of time. For example, cash in hand at the end of an accounting period can be compared to other accounting periods. This method is helpful in identifying the items which are changing the most.

In the second method of horizontal analysis, percentage differences in certain items are compared over a period of time. The absolute currency amounts are converted into the percentages for the purpose of comparison. For example, a change in cash from $5,000 to $5,500 will be reported as 10% increase in cash. It can also be reported as 110%, which means that the cash is 110% of the cash at the end of previous accounting period. This method is useful when comparing performance of two companies of different scale and size.

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horizontal analysis of financial statements

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Horizontal Analysis of Financial Statements

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Horizontal analysis of financial statements involves comparison of a financial ratio, a benchmark, or a line item over a number of accounting periods. This method of analysis is also known as trend analysis. Horizontal analysis allows the assessment of relative changes in different items over time.

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Horizontal analysis measures a company's operating performance. They do this by comparing the financial statement, the income statement and balance to the financial results filed in a period. The calculate this they subtract comparison period and base period and then divide it by the base period which will then equal the horizontal analysis percentage change.

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What is Horizontal Analysis?

Horizontal Analysis measures a company's operating performance by comparing its reported financial statements, i.e. the income statement and balance sheet, to the financial results filed in a base period.

How to Perform Horizontal Analysis (Step-by-Step)

Horizontal analysis, or "time series analysis", is oriented around identifying trends and patterns in the revenue growth profile, profit margins, and/or cyclicality (or seasonality) over a predetermined period.

The accounting period covered could be one-month, a quarter, or a full fiscal year.
Conceptually, the premise of horizontal analysis is that tracking a company's financial performance in real time and comparing those figures to its past performance (and that of industry peers) can be very practical.
Performing horizontal analysis can help determine the prevailing industry tailwinds (or headwinds), the forward-looking growth outlook in the market (e.g. the industry's projected CAGR), and the target customer's spending patterns, and a more in-depth understanding of the company's core performance drivers can thus be identified.

Common Size Analysis of Financial Statements

The findings of common size analysis as compiled in the preliminary stages of due diligence are critical.

In particular, the specific metrics and any notable patterns or trends that were identified can be compared across different companies - ideally to close competitors operating in the same industry - in order to evaluate each finding in more detail.

Per usual, the importance of completing sufficient industry research cannot be overstated here. In each industry, market participants attempt to solve different problems and encounter various obstacles, resulting in financial performance that reflects a given industry's state.

While peer-to-peer comparisons are performed as part of the horizontal analysis process, it is important to consider the external variables that impact operating performance, especially any industry-specific considerations and market conditions.

Profitability by Industry → Certain industries are comprised of high-growth companies where even publicly traded companies are unprofitable or struggling to turn a profit. In order to evaluate the profitability of companies in a specific industry, an average range must first be determined, as well as the factors that positively (or negatively) impact profit margins.

Competitive Landscape → Each industry is characterized by its own competitive dynamics and market leaders (i.e. the companies with the most market share). For instance, some industries are under constant threat of technological disruption, whereas others have far less exposure. The generation of long-term, sustainable profits is a function of possessing an "economic moat", which, to reiterate, is context-specific because no two industries are identical (and neither are the strategies that enabled the market leader to reach its current position).

Growth Profile → Finding profitable growth opportunities in a market is a challenging task in itself, but capitalizing on the opportunity can be even more difficult. With that said, growth is subjective and the maturity of the company must be considered for comparisons to be useful. For example, a company exhibiting low single-digit growth in revenue yet has a track record of long-lasting profitability (i.e. "cash cow") might not be appealing to an investor seeking companies at the forefront of disruptive technologies with consistent double-digit revenue growth. However, the goals of a mature, established company is entirely different from that of an early-stage, high-growth company with a future that is contingent on acquiring as many new users as possible and raising capital from venture capital (VC) or growth equity investors.

Cost Structure → At the end of the day, the reinvestment needs of a company is directly tied to the industry it operates within. For that reason, the amount of capital needed on hand to fund day-to-day working capital needs and capital expenditures (Capex), i.e. the purchase of long-term fixed assets, varies widely across industries. Long story short, the "common size" financial statements are only informative if the companies being compared as similar in nature in terms of the business model, target customer profile, end markets served, etc.

Horizontal Analysis Formula

The formula for conducting horizontal analysis is as follows.
Horizontal Analysis ($ Change) = Comparison Period - Base Period Horizontal Analysis (% Change) = (Comparison Period - Base Period) ÷ Base Period
In order to express the decimal amount in percentage form, the final step is to multiply the result by 100.

Comparison Period to Base Period Percentage Change Example

For example, if a company's current year (2022) revenue is $50 million in 2022 and its revenue in the base period, 2021, was $40 million, the net difference between the two periods is $10 million.

By dividing the net difference by the base figure, the percentage change comes out to 25%.

Horizontal Analysis (%) = $10 million ÷ $40 million = 0.25, or 25%

The base figure is most often pulled from one of the following sources:

1. The earliest period available in a given data set, i.e. the starting point from which progress is tracked.

2. The period prior to the current period, i.e. year-over-year (YoY) growth analysis.

3. The specific period determined by management to be the most insightful frame of reference against which to compare recent performance.

The latter two tend to go hand-in-hand because the most useful benchmark against which to compare recent performance is most often the preceding period.

In contrast, picking the earliest period for the comparison can show the most positive improvement over time, but the usefulness is somewhat limited considering the extent to how much the company has likely grown and changed given the time elapsed (and selecting a comparison period of underperformance can be misleading in portraying recent performance as better than in actuality).

The priority here should be to identify the company's areas of strengths and weaknesses to create an actionable plan to drive value creation and implement operating improvements.

Horizontal Analysis vs. Vertical Analysis

A fundamental part of financial statement analysis is comparing a company's results to its performance in the past and to the average industry benchmark set by comparable peers in the same (or adjacent) industry.

In particular, there are two forms of financial analysis where a company's income statement and its balance sheet is adjusted to be "common size", i.e. the financial data is expressed as percentages of a base figure, which enables comparisons to be closer to "apples to apples".

1. Horizontal Analysis → The comparison of a company's financial data between periods to spot trends (or developments), as well as for peer group benchmarking purposes. Thus, companies of different sizes in terms of total revenue and currently at different stages in their lifecycle can still be compared to obtain useful insights.

2. Vertical Analysis → In vertical analysis, each line item on the income statement is expressed as a percentage of a base figure, which is usually revenue (or sales). On the balance sheet, the same process is completed, but with the base figure typically being total assets.

Vertical analysis expresses each line item on a company's financial statements as a percentage of a base figure, whereas horizontal analysis is more about measuring the percentage change over a specified period.

In other words, vertical analysis can technically be completed with one column of data, but performing horizontal analysis is not practical unless there is enough historical data to have a useful point of reference.

In fact, there must be a bare minimum of at least data from two accounting periods for horizontal analysis to even be plausible.

Still, horizontal and vertical analyses are meant to be complementary and used in conjunction with the other, so the user can obtain the most comprehensive understanding of a company's historical performance and financial state as of the present date.

Horizontal Analysis Calculator - Excel Model Template

We'll now move to a modeling exercise, which you can access by filling out the form below.

Step 1. Income Statement and Balance Sheet Assumptions

Suppose we're tasked with performing horizontal analysis on a company's financial performance from fiscal years ending 2020 to 2021.

We'll start by inputting our historical income statement and balance sheet into an Excel spreadsheet.

The two tables below display the financial assumptions we'll be using here.

Step 2. Horizontal Analysis on Income Statement

Our first task is to evaluate our hypothetical company's income statement.

The first step to performing horizontal analysis is to calculate the net difference - in dollar terms ($) - between the comparable periods.

From 2021 to 2020, we'll take the comparison year (2021) and subtract the corresponding amount recorded in the base year (2020).

Once repeated for each line item, we are left with the following on the right column:

Revenue = +$45 million (45.0%)

COGS = -$20 million (50.0%)

Gross Profit = +25 million (41.7%)

SG&A = -$15 million (60.0%)

R&D = -$5 million (50.0%)

EBIT = + $5 million (20.0%)

Interest Expense = $0 million (0.0%)

EBT = +$5 million (25.0%)

Taxes = -$2 million (25.0%)

Net Income = +$4 million (25.0%)

Step 3. Horizontal Analysis on Balance Sheet

In the final section, we'll perform horizontal analysis on our company's historical balance sheet.

As in the prior step, we must calculate the dollar value of the year-over-year (YoY) variance and then divide the difference by the base year metric.

Cash and Equivalents = +$20 million (25.0%)

Accounts Receivable = +15 million (30.0%)

Inventory = +5 million (12.5%)

Prepaid Expenses = $0 million (0.0%)

Total Current Assets = +$40 million (22.2%)

PP&E, net = +20 million (10.0%)

Total Assets = +$60 million (15.8%)

Accounts Payable = +$15 million (25.0%)

Accrued Expenses = +5 million (14.3%)

Total Current Liabilities = +$20 million (21.1%)

Long-Term Debt = +15 million (17.6%)

Total Liabilities = +$35 million (19.4%)

Total Equity = +$25 million (12.5%)

In conclusion, we're able to compare the year-over-year (YoY) performance of our company from 2020 to 2021.

While the net differential on its own does not provide many practical insights, the fact that the difference is expressed in percentage form facilitates comparisons to the company's base period and to the performance of that of its comparable peers.

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Horizontal Analysis measures a company's operating performance by comparing its reported financial statements, i.e. the income statement and balance sheet, to the financial results filed in a base period. Horizontal analysis, or "time series analysis", is oriented around identifying trends and patterns in the revenue growth profile, profit margins, and/or cyclicality (or seasonality) over a predetermined period.

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I think this is a very popular link a lot of other students found as well that helps describe Horizontal Analysis. It gives us a summary of what that all entails - easy to understand.

Horizontal analysis is the comparison of historical financial information over various reporting periods.

It helps determine a companies’ growth and financial position versus  competitors.

The horizontal analysis technique uses a base year and a comparison year to determine a company’s growth.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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https://www.educba.com/horizontal-analysis-formula/

A horizontal analysis is a financial analysis used to evaluate a company's performance over time. It also looks at the current period and periods prior, so the company can see how they compare. I like the resource I chose because it also includes a step be step guide on how to make your own.

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Horizontal Analysis Formula (Table of Contents)
What is the Horizontal Analysis Formula?

The term "Horizontal Analysis" refers to the financial statement analysis in historical data from the income statement, balance sheet, and cash flow statement is compared with each other. In other words, it indicates the change either in absolute terms or as a percentage change year over year (Y-o-Y) in each of the line items. The formula for horizontal analysis (absolute terms) can be derived by deducting the amount in the base year from the amount in the comparison year. Mathematically, it is represented as,
Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year
The formula for horizontal analysis (% change) can be derived by dividing the difference between the amount in the comparison year and the base year's amount in the base year. Mathematically, it is represented as,
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Example of Horizontal Analysis Formula (With Excel Template)

Let's take an example to understand the calculation of Horizontal Analysis in a better manner.

Example #1
Let us take the example of a company named ASD Inc., which is a manufacturer of precision components for tier I OEMs. From its latest annual report, the following income statement is available: Solution:
Horizontal Analysis is calculated using the formula given below
Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year
Similarly, Calculated for below

Horizontal Analysis is calculated using the formula given below
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Similarly, Calculated for below

In the above table, it can be seen that:

The percentage change in gross profit has been relatively higher than that of net sales due to a lower increase in the cost of goods sold.

Further, operating income and net income have also witnessed higher growth due to a lower increase in SG&A expense and income tax respectively.

Example #2

Gross Profit is Calculated as
Let us take the annual report of Apple Inc. for the year 2018 to illustrate the financial statement's preparation of horizontal analysis. In this case, we will be using the income statement and accordingly, the following information has been extracted from the annual report:
Similarly Calculated For Years 2017 and 2016.
Solution:
Operating Income is Calculated as

Similarly Calculated For Years 2017 and 2016.

Net Income is calculated as

Similarly Calculated For Years 2017 and 2016.

Horizontal Analysis is calculated using the formula given below

Similarly, Calculated for below

Similarly, Calculated for the year 2017

Similarly, Calculated for below
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Conduct a horizontal analysis of Apple Inc.'s income statement and provide your insights on the same.

The overall growth has been relatively higher in the year 2018 compared to that of the year 2017. Nevertheless, it indicates that the company has witnessed continuous growth in the last two years.

Further, it is also noticed that the operating income moves in tandem with the revenue growth, which is a good sign.

Source Link: Apple Inc. Balance Sheet

Explanation

The formula for Horizontal Analysis can be calculated by using the following steps:

Step 1: Firstly, note the line item's amount in the base year from the financial statement.

Step 2: Next, note the amount of the line item in the comparison year.

Step 3: Now, the formula for in absolute terms can be derived by deducting the amount in the base year (step 1) from the amount in comparison year (step 2), as shown below.

Step 4: Finally, the formula for horizontal analysis in percentage can be derived by dividing the difference between the amount in the comparison year and the amount in the base year (step 3) by the amount in the base year (step 1), as shown below.

Relevance and Use of Horizontal Analysis Formula

It is important to understand the concept of horizontal analysis because of the following reasons. It helps in determining the trend in each line item Y-o-Y. Any stark deviation in trend may be an indication of some anomaly in reporting that requires immediate investigation. It can be used to assess the performance of a company over a period of time. This analysis technique can provide an overall picture of where the subject company stands in terms of financial matters.

Horizontal Analysis Formula Calculator

You can use the following Horizontal Analysis Formula Calculator

Recommended Articles

This is a guide to Horizontal Analysis Formula. Here we discuss how to calculate the Horizontal Analysis along with practical examples. We also provide a Horizontal Analysis calculator with a downloadable excel template. You may also look at the following articles to learn more -

1. Cost-Benefit Analysis Formula

2. Break Even Analysis Formula

3. Vertical Analysis of Income Statement

4. Variance Analysis Formula

5. Different Types of Balance Sheet Ratios

Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year)/ Amount in Base Year]* 100

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Horizontal Analysis Formula | Calculator (Example with Excel Template)

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Horizontal Analysis Formula (Table of Contents) The term "Horizontal Analysis" refers to the financial statement analysis in historical data from the income statement, balance sheet, and cash flow statement is compared with each other.

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Horizontal Analysis is a technique used by businesses to evaluate a business's performance overtime. By comparing prior financials to current financials, a business is able to see where a change was made and the magnitude of the change.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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https://corporatefinanceinstitute.com/resources/accounting/horizontal-analysis/
Horizontal analysis is a technique that determine a company performance over time. It can determine a companies growth and financial position in comparison to competitors. Balance sheet, cash flow statement and income statement play a factor in a business performance. the technique uses a base year and a comparison year to determine a company growth. The financial statement values can be expressed as a percentage and in US dollars. This article shows two equations. The first one would be how to figure out the percentages and the other one shows how to solve in dollars.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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A horizontal analysis is used to project the amount of various item into the future. It helps spot differences from more than just an annual or quarterly basis. For example, a horizontal analysis of employee benefits expense over multiple periods could be used to spot an increase in medical insurance rates.

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Advantages of Horizontal Analysis

The key advantage of using horizontal analysis is that it allows for the visual identification of anomalies from long-running trends. By presenting data on a comparative basis, changes in the data are more readily apparent. In addition, the use of horizontal analysis makes it easier to project trends into the future. Yet another advantage of this form of data presentation is when trends can be compared to those of competitors or industry averages, to see how well an organization's performance compares with that of other entities.

A further advantage is that it requires little skill to spot anomalies in a trend, while other forms of analysis may require extensive experience to discern whether the numbers in a presentation are indicative of problems.

Problems with Horizontal Analysis

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, due to ongoing changes in the chart of accounts, so that revenues, expenses, assets, or liabilities may shift between different accounts and therefore appear to cause variances when comparing account balances from one period to the next.

Horizontal analysis can be misused to report skewed findings. This can happen when the analyst modifies the number of comparison periods used to make the results appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous month, but are actually quite poor when compared to the results for the same month in the preceding year. Consistent use of comparison periods can mitigate this problem. Also, when an analysis is presented on a repetitive basis over many reporting periods, any changes in the comparison periods should be disclosed, to make readers aware of the difference.

Horizontal Analysis of the Income Statement

Horizontal analysis of the income statement is usually in a two-year format, such as the one shown below, with a variance also shown that states the difference between the two years for each line item. An alternative format is to simply add as many years as will fit on the page, without showing a variance, so that you can see general changes by account over multiple years. A third format is to include a vertical analysis of each year in the report, so that each year shows expenses as a percentage of the total revenue in that year.

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Horizontal analysis definition — AccountingTools

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Horizontal analysis is the comparison of historical financial information and ratios over a series of reporting periods. It can be used to forecast outcomes.

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https://www.fool.com/the-ascent/small-business/accounting/articles/horizontal-analysis/
Using this resource, I learned what a horizontal analysis is and learned how to perform one step by step. With the step-by-step guide, it provided an example with a visual element.

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A Beginner’s Guide to Horizontal Analysis

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Horizontal analysis compares financial statements to get an in-depth look at financial performance. Here's how horizontal analysis can help you spot key trends.

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Horizontal analysis is financial information or statements over multiple reporting periods, used to evaluate a company’s performance. You only need the use of two different accounting periods to make a horizontal analysis comparison. However, it is not ideal because the more periods you have to compare the more accurate your results will be. With use of this technique, it allows you to spot and evaluate trends over a period of time while also showing a company's growth and financial position.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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Horizontal Analysis- Zoe Hernandez Martinez

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Horizontal Analysis- Zoe Hernandez Martinez

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https://www.investopedia.com/terms/h/horizontalanalysis.asp
Horizontal Analysis is the comparison of financial statements taken at specific periods of times. They help businesses, investors, or creditors determine the finial health of the company.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis. Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

Horizontal Analysis FAQs

How Is Horizontal Analysis Performed?

To perform a horizontal analysis:

1. Choose a line item, account balance, or ratio that you want to analyze.

2. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.

3. Calculate thepercentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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If a business is looking to review their financial trends a Horizontal Analysis on financial statements is a great way. Horizontal Analysis is a comparison between current year and base year for specific periods. The link I proved gives a in depth definition, explanation and example of Horizontal Analysis. The overall goal is to determine what phase the business is in compared to its competitors.

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Finance Strategists Helping People with Their Finances

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Horizontal analysis is an approach to analyzing financial statements.

It compares historical data, which includes ratios and line items, over a series of accounting periods. The accounting period can be a month, a quarter, or a year.

This method of analysis is also known as trend analysis.

The horizontal method of analysis is used to identify changes in financial statements over time and assess those changes.

A base year is initially selected as a benchmark. Either the data of the rest of the years is expressed as a percentage of the base year or an absolute comparison is performed. The base year comparison is known as base year analysis.

This method of analysis makes it easy for the financial statement user to spot patterns and trends over the years.

An absolute comparison involves comparing the amount of the same line of the item to its amounts in the other accounting periods. For example, comparing the accounts receivables of one year to those of the previous year. Any changes are analyzed then.

In percentage comparison, the increase or decrease in amounts is expressed as a percentage of the amount in the base year.

For example, if the base year amount of cash is $100, a 10% increase would make the current accounting period's amount $110, whereas a 10% decrease would be $90.

Different ratios, such as earnings per share (EPS) or current ratio, are also compared for different accounting periods.

Horizontal Analysis: Explanation

Horizontal analysis focuses on the dollar and percentage changes that occur in specific accounts from year to year.

Determining the percentage change is important because it links the degree of change to the actual amounts involved. In this way, percentage changes are better for comparative purposes with other firms than are actual dollar changes.

For example, a $1 million increase in General Motors' cash balance is likely to represent a much smaller percentage increase than a corresponding $1 million increase in American Motors' cash balance.

To calculate percentage changes, you can use the following formula:
Percentage change = (Amount of dollar change / Base year amount) x 100
The base year is always the first year in the comparison.

For example, suppose that Safeway's total current assets were $1,729,146,000 in 2018 and $1,861,389,000 in 2019. This represents a dollar increase of $132,243,000 and a percentage increase of 7.65%, which is calculated as follows:

Percentage change = ($1,861,389,000 - $1,729,146,000 / 1,729,149,000) x 100 = 7.65%

You can also use horizontal analysis in conjunction with both the balance sheet and the income statement.

In the example shown below, comparative balance sheets and income statements are given for Safeway Stores. The tables show the dollar and percentage changes.

Several interesting balance sheet changes are apparent in the tables below. In 2019, Safeway Stores increased its operating of fixed assets. There were rises of more than 12% in all categories of property other than transport equipment.

This increase in capital expenditures is also reflected on the liability side of the balance sheet. In particular, notes and debentures increased by over 53%.

In this discussion and analysis of operations, Safeway's management noted that the increase was due to a growing trend toward mortgage financing.

Comparative Balance Sheets With Horizontal Analysis

Comparative Income Statements With Horizontal Analysis

Horizontal analysis of income statements also produces worthwhile information.

For example, in Safeway Stores' balance sheets, both sales and the cost of sales increased from 2018 to 2019.

However, the percentage increase in sales was greater than the percentage increase in the cost of sales. This led to an increase in gross profit from 2018 to 2019.

Operating and administrative expenses also increased slightly and interest expense increased by over 12%. This resulted in only a slight increase in net income for 2019 over 2018.

The Usefulness of Horizontal Analysis

Consistency and comparability are generally accepted accounting principles ( GAAP).

Consistency is important when performing horizontal analysis of financial statements. When the same accounting standards are used over the years, the financial statements of the company are easier to compare and trends are easily analyzed.

Comparability means that a company's financial statements can be compared to those of another company in the same industry.

Horizontal analysis enables investors, analysts, and other stakeholders in the company to see how well the company is performing financially.

A company's financial performance over the years is assessed and changes in different line items and ratios are analyzed. Negative changes and trends are further investigated.

Horizontal analysis also makes it easier to detect when a business is underperforming.

For example, if a company starts generating low profits in a particular year, expenses can be analyzed for that year. This makes it easier to spot inefficiencies and specific areas of underperformance.

Ratios such as asset turnover, inventory turnover, and receivables turnover are also important because they help analysts to fully gauge the performance of a business.

For example, a low inventory turnover would imply that sales are low, the company is not selling its inventory, and there is a surplus. This could also be due to poor marketing or excess inventory due to seasonal demand.

Ratios such as earnings per share, return on assets, and return on equity are similarly invaluable. These ratios make problems related to the growth and profitability of a company evident and clear.

Liquidity ratios are needed to check if the company is liquid enough to settle its debts and pay back any liabilities. Horizontal analysis makes it easy to detect these changes and compare growth rates and profitability with other companies in the industry.

Example

Let's take a look at this simple example before we discuss any further. Each item in a financial statement is compared to the base year. In this case, if management compares direct sales between 2007 and 2006 (the base year), it is clear that there is an increase of 3.2%.

This result would be concerning for the company's management. They would investigate this if they expected at least a 10% increase.

To provide another example, consider an investor who is seeking to invest and finds company C. Company C's figures for the previous year are as follows: net income $2m and retained earnings $10m.

The current year's details are the following: net income $4m and retained earnings $12m. Net income has grown by 100% and retained earnings have increased by only 20%.

The investor now needs to make a decision based on their analysis of the figures, as well as a comparison to other similar figures.

Criticisms of Horizontal Analysis

Regardless of how useful trend analysis may be, it is regularly criticized.

One reason is that analysts can choose a base year where the company's performance was poor and base their analysis on it. In this way, the current accounting period (or any other accounting period) can be made to appear better.

Another problem with horizontal analysis is that some companies change the way they present information in their financial statements. This can create difficulties in detecting troublesome areas, making it hard to spot changes in trends.

Horizontal Analysis: Discussion

To conclude, it is always worth performing horizontal analysis, but it should never be relied upon too heavily. Other factors should also be considered, and only then should a decision be made.

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Horizontal Analysis of Financial Statements | Definition and Examples

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Horizontal analysis is an approach to analyzing financial statements . It compares historical data, which includes ratios and line items, over a series of accounting periods. The accounting period can be a month, a quarter, or a year. This method of analysis is also known as trend analysis.

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Despite the title of this website I found the content to be accurate and straightforward. It highlights what financial analysis is and shows a real world type example, which I found to be helpful. It sums up horizontal analysis as a way to recognize trends in a business as a comparison of two or more different periods and on the income and balance sheet. It briefly walks through different comparisons that could be made and what to look for as well as why its better to have more than just two differencing time periods to compare. Overall, I found this article helpful and had the best examples.

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A Beginner’s Guide to Horizontal Analysis

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Horizontal analysis compares financial statements to get an in-depth look at financial performance. Here's how horizontal analysis can help you spot key trends.

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Horizontal Analysis

https://corporatefinanceinstitute.com/resources/accounting/horizontal-analysis/

This website has a great definition of Horizontal analysis which is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period with information from another period. This website also has great examples to break down how this is used.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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https://corporatefinanceinstitute.com/resources/accounting/horizontal-analysis/
https://www.fool.com/the-ascent/small-business/accounting/articles/horizontal-analysis/

Horizontal Analysis uses an income statement or balance sheet to track accounting for a specific period of time. It helps companies to grow and their financial position versus its competitors.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period with information from other periods. It is used to analyze historical trends. It compares current years values against those of the base year. Sometimes a percentage or absolute comparison may be used to compare vertical analysis. Horizontal analysis compares specific financial statements with other periods of the cross-sectional analysis of a company against another company. Horizontal Analysis - Overview, Key Metrics, Example (corporatefinanceinstitute.com)

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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While researching horizontal analysis I found this website to be the most useful. It gives a good explanation of what horizontal analysis is, how and why it is used and gives examples of how to calculate values. It also touches on some of the drawbacks of using horizontal analysis. There are also more links at the bottom of the page to help with more understanding.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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I found this video to be very interesting and informative. Horizontal analysis is a plan where financial statements are compared to other years for a specific period of time. It also gives you ideas on how to start your own business or company. This video shows you good examples of how to read a horizontal analysis sheet as well. I would recommend this video or any videos on this analysis to visually see the analysis protocol.

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horizontal analysis - Visicom Video Search Results

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The search engine that helps you find exactly what you're looking for. Find the most relevant information, video, images, and answers from all across the Web.

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Horizontal Analysis is used by comparing financials statements from certain periods of time with information from other time periods. This analysis helps define a company’s growth and financial standing compared to their competition. In a horizontal Analysis, balance sheets, cash flow statements, and income statement provide a clear-cut picture of how a company is performing. Calculations are represented as percentages when doing a horizontal analysis. to calculate the dollar change, one would subtract the value of the base year from the comparison year. Then it would be divided by the base year and multiplied by 100.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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This website was very helpful to me. What is a horizontal analysis? A horizontal analysis can be done by gathering information from a single entity across periods of time and this is done by investors and/or creditors to evaluate the financial health of a business. This is a comparison that can be done using the financial statements, by looking at the data horizontally for previous year and comparing it. This will tell you if there has been a decrease or an increase, after that a percentage can also be calculated.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily.

Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

How to Perform a Horizontal Analysis

A horizontal analysis is performed by following the three primary steps.

Step 1: Gather Financial Information

To perform a horizontal analysis, you must first gather financial information of a single entity across periods of time. Most horizontal analysis entail pulling quarterly or annual financial statements, though specific account balances can be pulled if you're looking for a specific type of analysis.

Be mindful that the gaps between each financial statement are consistent. You can choose whatever interval (month-over-month, year-over-year, etc.), but each iterative financial statement should be equal distance away regarding when it was issued compared to other bits of financial information.

Step 2: Determine Comparison Methods

With the financial information in hand, it's time to decide how to analyze the information. There are several primary comparison methods.

First, a direction comparison simply looks at the results from one period and comparing it to another. For example, the total company-wide revenue last quarter might have been $75 million, while the total company-wide revenue this quarter might be $85 million. This type of comparison is most often used to spot high-level, easily identifiable differences.

Second, a variance analysis determines not only the dollar amount but the direction of change for a given general ledger account. As opposed to simply identifying the difference between two numbers, variance analysis strives to determine the company's financial health by identifying directional changes, frequency of directions, or how each financial result compared against an internal target (i.e. a budget).

Last, a horizontal analysis can encompass calculating percentage changes from one period to the next. As a company grows, it often becomes more difficult to sustain the same rate of growth, even if the company grows in pure dollar size. This percentage method is most useful when identifying changes over a longer period of time where there may be significant deviations from the base period to the current period.

Step 3: Identify Trends and Patterns

With different bits of calculated information now embedded into the financial statements, it's time to analyze the results. The identification of trends and patterns is driven by asking specific, guided questions. For example, upper management may ask "how well did each geographical region manage COGS over the past four quarters?". This type of question guides itself to selecting certain horizontal analysis methods and specific trends or patterns to seek out.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis.

Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts.

For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million.

In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year.

Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

When Can Horizontal Analysis Be Used?

Horizontal analysis is most useful when an entity has been established, has strong record-keeping capabilities, and has traceable bits of historical information that can be dug into for more information as needed. This type of analysis is more specific relevant for analyzing the value we maybe selling or acquiring.

The Bottom Line

Horizontal analysis is a financial analysis technique used to evaluate a company's performance over time. By comparing prior-period financial results with more current financial results, a company is better able to spot the direction of change in account balances and the magnitude in which that change has occurred.

# data[].attributes.attachment_link.title
Horizontal Analysis: What It Is vs. Vertical Analysis

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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Kianna Campos                   Horizontal Analysis

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Kianna Campos                   Horizontal Analysis

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Horizontal Analysis is a financial report that compares the company's ratios over a certain number of accounting spans. It shows how the company is performing in a specific amount of time and displays numbers of data on how the company is increasing profit or decreasing.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis. Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

Horizontal Analysis FAQs

How Is Horizontal Analysis Performed?

To perform a horizontal analysis:

1. Choose a line item, account balance, or ratio that you want to analyze.

2. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.

3. Calculate thepercentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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This article was the most resourceful article that I read on Horizontal Analysis. It covers everything you need to know from a description and an example and has the critical metrics of horizontal analysis. It most importantly tells you why it is essential, and that is because horizontal analysis provides a broad comparison of a company's financial performance over time.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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Horizontal Analysis - Overview, Key Metrics, Example (corporatefinanceinstitute.com)

Horizontal analysis is the approach that gets used to help you analyze a financial statement and helps with comparing the specific financial information that gets used during the account period and helps with information from other periods. One of the main goals with this is to help you determine if there is an increase or decrease in the specific values. Horizontal analysis can also be compared to vertical analysis. The horizontal analysis will compare the specific financial statement with other periods or they can do cross-sectional analysis of one company against another company.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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I feel this site gave me the most information on how to do a Horizontal Analysis on financial information.  It provides a description of what it is, why it is important to complete one and the drawbacks of them as well.  It also provides an example of how to complete one with diagrams of the formulas used as well as additional resources that can be used.
~Angie Hernandez

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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Horizontal analysis allows you to compare revenue fro both years to see if it increased or if its still remained. This website will provide more information on how to set it up and use the proper formula to find the totals of your revenue.

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Horizontal Analysis Formula (Table of Contents)
What is the Horizontal Analysis Formula?

The term "Horizontal Analysis" refers to the financial statement analysis in historical data from the income statement, balance sheet, and cash flow statement is compared with each other. In other words, it indicates the change either in absolute terms or as a percentage change year over year (Y-o-Y) in each of the line items. The formula for horizontal analysis (absolute terms) can be derived by deducting the amount in the base year from the amount in the comparison year. Mathematically, it is represented as,
Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year
The formula for horizontal analysis (% change) can be derived by dividing the difference between the amount in the comparison year and the base year's amount in the base year. Mathematically, it is represented as,
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Example of Horizontal Analysis Formula (With Excel Template)

Let's take an example to understand the calculation of Horizontal Analysis in a better manner.

Example #1
Let us take the example of a company named ASD Inc., which is a manufacturer of precision components for tier I OEMs. From its latest annual report, the following income statement is available: Solution:
Horizontal Analysis is calculated using the formula given below
Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year
Similarly, Calculated for below

Horizontal Analysis is calculated using the formula given below
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Similarly, Calculated for below

In the above table, it can be seen that:

The percentage change in gross profit has been relatively higher than that of net sales due to a lower increase in the cost of goods sold.

Further, operating income and net income have also witnessed higher growth due to a lower increase in SG&A expense and income tax respectively.

Example #2

Gross Profit is Calculated as
Let us take the annual report of Apple Inc. for the year 2018 to illustrate the financial statement's preparation of horizontal analysis. In this case, we will be using the income statement and accordingly, the following information has been extracted from the annual report:
Similarly Calculated For Years 2017 and 2016.
Solution:
Operating Income is Calculated as

Similarly Calculated For Years 2017 and 2016.

Net Income is calculated as

Similarly Calculated For Years 2017 and 2016.

Horizontal Analysis is calculated using the formula given below

Similarly, Calculated for below

Similarly, Calculated for the year 2017

Similarly, Calculated for below
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Conduct a horizontal analysis of Apple Inc.'s income statement and provide your insights on the same.

The overall growth has been relatively higher in the year 2018 compared to that of the year 2017. Nevertheless, it indicates that the company has witnessed continuous growth in the last two years.

Further, it is also noticed that the operating income moves in tandem with the revenue growth, which is a good sign.

Source Link: Apple Inc. Balance Sheet

Explanation

The formula for Horizontal Analysis can be calculated by using the following steps:

Step 1: Firstly, note the line item's amount in the base year from the financial statement.

Step 2: Next, note the amount of the line item in the comparison year.

Step 3: Now, the formula for in absolute terms can be derived by deducting the amount in the base year (step 1) from the amount in comparison year (step 2), as shown below.

Step 4: Finally, the formula for horizontal analysis in percentage can be derived by dividing the difference between the amount in the comparison year and the amount in the base year (step 3) by the amount in the base year (step 1), as shown below.

Relevance and Use of Horizontal Analysis Formula

It is important to understand the concept of horizontal analysis because of the following reasons. It helps in determining the trend in each line item Y-o-Y. Any stark deviation in trend may be an indication of some anomaly in reporting that requires immediate investigation. It can be used to assess the performance of a company over a period of time. This analysis technique can provide an overall picture of where the subject company stands in terms of financial matters.

Horizontal Analysis Formula Calculator

You can use the following Horizontal Analysis Formula Calculator

Recommended Articles

This is a guide to Horizontal Analysis Formula. Here we discuss how to calculate the Horizontal Analysis along with practical examples. We also provide a Horizontal Analysis calculator with a downloadable excel template. You may also look at the following articles to learn more -

1. Cost-Benefit Analysis Formula

2. Break Even Analysis Formula

3. Vertical Analysis of Income Statement

4. Variance Analysis Formula

5. Different Types of Balance Sheet Ratios

Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year)/ Amount in Base Year]* 100

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Horizontal Analysis Formula | Calculator (Example with Excel Template)

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Horizontal Analysis Formula (Table of Contents) The term "Horizontal Analysis" refers to the financial statement analysis in historical data from the income statement, balance sheet, and cash flow statement is compared with each other.

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I found this article very interesting and helpful, the information is easy to understand, and it even explains how to perform a horizontal analysis.
Horizontal analysis is a financial analysis technique used to evaluate a company's performance over time. By comparing prior-period financial results with more current financial results, a company is better able to spot the direction of change in account balances and the magnitude in which that change has occurred.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily.

Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

How to Perform a Horizontal Analysis

A horizontal analysis is performed by following the three primary steps.

Step 1: Gather Financial Information

To perform a horizontal analysis, you must first gather financial information of a single entity across periods of time. Most horizontal analysis entail pulling quarterly or annual financial statements, though specific account balances can be pulled if you're looking for a specific type of analysis.

Be mindful that the gaps between each financial statement are consistent. You can choose whatever interval (month-over-month, year-over-year, etc.), but each iterative financial statement should be equal distance away regarding when it was issued compared to other bits of financial information.

Step 2: Determine Comparison Methods

With the financial information in hand, it's time to decide how to analyze the information. There are several primary comparison methods.

First, a direction comparison simply looks at the results from one period and comparing it to another. For example, the total company-wide revenue last quarter might have been $75 million, while the total company-wide revenue this quarter might be $85 million. This type of comparison is most often used to spot high-level, easily identifiable differences.

Second, a variance analysis determines not only the dollar amount but the direction of change for a given general ledger account. As opposed to simply identifying the difference between two numbers, variance analysis strives to determine the company's financial health by identifying directional changes, frequency of directions, or how each financial result compared against an internal target (i.e. a budget).

Last, a horizontal analysis can encompass calculating percentage changes from one period to the next. As a company grows, it often becomes more difficult to sustain the same rate of growth, even if the company grows in pure dollar size. This percentage method is most useful when identifying changes over a longer period of time where there may be significant deviations from the base period to the current period.

Step 3: Identify Trends and Patterns

With different bits of calculated information now embedded into the financial statements, it's time to analyze the results. The identification of trends and patterns is driven by asking specific, guided questions. For example, upper management may ask "how well did each geographical region manage COGS over the past four quarters?". This type of question guides itself to selecting certain horizontal analysis methods and specific trends or patterns to seek out.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis.

Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts.

For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million.

In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year.

Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

When Can Horizontal Analysis Be Used?

Horizontal analysis is most useful when an entity has been established, has strong record-keeping capabilities, and has traceable bits of historical information that can be dug into for more information as needed. This type of analysis is more specific relevant for analyzing the value we maybe selling or acquiring.

The Bottom Line

Horizontal analysis is a financial analysis technique used to evaluate a company's performance over time. By comparing prior-period financial results with more current financial results, a company is better able to spot the direction of change in account balances and the magnitude in which that change has occurred.

# data[].attributes.attachment_link.title
Horizontal Analysis: What It Is vs. Vertical Analysis

# data[].attributes.attachment_link.description
Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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Horizontal Analysis is the comparison of financial information over a various reporting time period. It will help determine a companies growth and their financial position versus its competitors.

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Horizontal Analysis: Definition, Formula & Examples | Layer Blog

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A Horizontal Analysis allows you to analyze financial statements to identify historical trends. Here’s everything you need to know about Horizontal Analysis.

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https://study.com/learn/lesson/horizontal-analysis-formula-methods.html
This site broke all of the aspects of horizontal analysis down well. It explained that it is basically a tool used to spot trends, negative and positive, in a businesses finances.

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Horizontal analysis is a plan where financial statements are compared to disclose financial performance over a specific period of time. Businesses use it to find trends in their business. This article has a lot of important information on how to start a Horizontal Analysis and also shows you the formulas to use. The Horizontal Analysis gives you examples on how to start your own for your business or company. The website I chose on Horizontal Analysis break down the step and compares to vertical analysis. It can show if your business is increasing or decreasing its net income.

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A Beginner’s Guide to Horizontal Analysis

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Horizontal analysis compares financial statements to get an in-depth look at financial performance. Here's how horizontal analysis can help you spot key trends.

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Horizontal Analysis - Caroline Glazebrook

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Horizontal Analysis - Caroline Glazebrook

# data[].attributes.body
Horizontal analysis is used to compare ratios, line items, historical data, over a number of accounting periods. It also allows users to spot growth and trend patterns. Horizontal analysis allows investors and analysts to see what drives a company's growth and performance. It usually is depicted as a percentage growth over the same line item in the base year. The article provided gives detailed steps on how to perform a horizontal analysis.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis. Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

Horizontal Analysis FAQs

How Is Horizontal Analysis Performed?

To perform a horizontal analysis:

1. Choose a line item, account balance, or ratio that you want to analyze.

2. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.

3. Calculate thepercentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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A horizontal analysis is when financial statements from a company are compared and show a business their financial operations over a specific period of time. Businesses use this to view financial trends/patterns in their businesses accounting periods. This way of evaluating data uses a line-by-line differentiation to compare a company's totals. Therefore, increases or decreases are spotted easier and quicker which allows a company to solve any problems in a timely manner. Horizontal analysis can also be used with an income statement or balance sheets. It’s better for a company to use two or more accounting periods when creating a horizontal analysis, that way it is more rational to spot actual trend differences. These trends include how much revenue is being produced within a quarter or year, deciding if the cost of goods being sold are going up or down, and is their overall net income increasing or decreasing? As for how to perform a horizontal analysis you must start with an income statement or balance sheet for the periods you want to compare and then decide how you want to approach your analysis. There are several choices on how to do so such as, direct comparison, variance or percentage and then review the results.

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A Beginner’s Guide to Horizontal Analysis

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Horizontal analysis compares financial statements to get an in-depth look at financial performance. Here's how horizontal analysis can help you spot key trends.

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This site really just explain in depth whst horizontal analysis is and explains of financial statements . Also talks about the key words you should know about too . This site also gives examples on comparative balance sheets with horizontal analysis, and also gives an example of comparative income statements with horizontal analysis.

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Finance Strategists Helping People with Their Finances

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Horizontal analysis is an approach to analyzing financial statements.

It compares historical data, which includes ratios and line items, over a series of accounting periods. The accounting period can be a month, a quarter, or a year.

This method of analysis is also known as trend analysis.

The horizontal method of analysis is used to identify changes in financial statements over time and assess those changes.

A base year is initially selected as a benchmark. Either the data of the rest of the years is expressed as a percentage of the base year or an absolute comparison is performed. The base year comparison is known as base year analysis.

This method of analysis makes it easy for the financial statement user to spot patterns and trends over the years.

An absolute comparison involves comparing the amount of the same line of the item to its amounts in the other accounting periods. For example, comparing the accounts receivables of one year to those of the previous year. Any changes are analyzed then.

In percentage comparison, the increase or decrease in amounts is expressed as a percentage of the amount in the base year.

For example, if the base year amount of cash is $100, a 10% increase would make the current accounting period's amount $110, whereas a 10% decrease would be $90.

Different ratios, such as earnings per share (EPS) or current ratio, are also compared for different accounting periods.

Horizontal Analysis: Explanation

Horizontal analysis focuses on the dollar and percentage changes that occur in specific accounts from year to year.

Determining the percentage change is important because it links the degree of change to the actual amounts involved. In this way, percentage changes are better for comparative purposes with other firms than are actual dollar changes.

For example, a $1 million increase in General Motors' cash balance is likely to represent a much smaller percentage increase than a corresponding $1 million increase in American Motors' cash balance.

To calculate percentage changes, you can use the following formula:
Percentage change = (Amount of dollar change / Base year amount) x 100
The base year is always the first year in the comparison.

For example, suppose that Safeway's total current assets were $1,729,146,000 in 2018 and $1,861,389,000 in 2019. This represents a dollar increase of $132,243,000 and a percentage increase of 7.65%, which is calculated as follows:

Percentage change = ($1,861,389,000 - $1,729,146,000 / 1,729,149,000) x 100 = 7.65%

You can also use horizontal analysis in conjunction with both the balance sheet and the income statement.

In the example shown below, comparative balance sheets and income statements are given for Safeway Stores. The tables show the dollar and percentage changes.

Several interesting balance sheet changes are apparent in the tables below. In 2019, Safeway Stores increased its operating of fixed assets. There were rises of more than 12% in all categories of property other than transport equipment.

This increase in capital expenditures is also reflected on the liability side of the balance sheet. In particular, notes and debentures increased by over 53%.

In this discussion and analysis of operations, Safeway's management noted that the increase was due to a growing trend toward mortgage financing.

Comparative Balance Sheets With Horizontal Analysis

Comparative Income Statements With Horizontal Analysis

Horizontal analysis of income statements also produces worthwhile information.

For example, in Safeway Stores' balance sheets, both sales and the cost of sales increased from 2018 to 2019.

However, the percentage increase in sales was greater than the percentage increase in the cost of sales. This led to an increase in gross profit from 2018 to 2019.

Operating and administrative expenses also increased slightly and interest expense increased by over 12%. This resulted in only a slight increase in net income for 2019 over 2018.

The Usefulness of Horizontal Analysis

Consistency and comparability are generally accepted accounting principles ( GAAP).

Consistency is important when performing horizontal analysis of financial statements. When the same accounting standards are used over the years, the financial statements of the company are easier to compare and trends are easily analyzed.

Comparability means that a company's financial statements can be compared to those of another company in the same industry.

Horizontal analysis enables investors, analysts, and other stakeholders in the company to see how well the company is performing financially.

A company's financial performance over the years is assessed and changes in different line items and ratios are analyzed. Negative changes and trends are further investigated.

Horizontal analysis also makes it easier to detect when a business is underperforming.

For example, if a company starts generating low profits in a particular year, expenses can be analyzed for that year. This makes it easier to spot inefficiencies and specific areas of underperformance.

Ratios such as asset turnover, inventory turnover, and receivables turnover are also important because they help analysts to fully gauge the performance of a business.

For example, a low inventory turnover would imply that sales are low, the company is not selling its inventory, and there is a surplus. This could also be due to poor marketing or excess inventory due to seasonal demand.

Ratios such as earnings per share, return on assets, and return on equity are similarly invaluable. These ratios make problems related to the growth and profitability of a company evident and clear.

Liquidity ratios are needed to check if the company is liquid enough to settle its debts and pay back any liabilities. Horizontal analysis makes it easy to detect these changes and compare growth rates and profitability with other companies in the industry.

Example

Let's take a look at this simple example before we discuss any further. Each item in a financial statement is compared to the base year. In this case, if management compares direct sales between 2007 and 2006 (the base year), it is clear that there is an increase of 3.2%.

This result would be concerning for the company's management. They would investigate this if they expected at least a 10% increase.

To provide another example, consider an investor who is seeking to invest and finds company C. Company C's figures for the previous year are as follows: net income $2m and retained earnings $10m.

The current year's details are the following: net income $4m and retained earnings $12m. Net income has grown by 100% and retained earnings have increased by only 20%.

The investor now needs to make a decision based on their analysis of the figures, as well as a comparison to other similar figures.

Criticisms of Horizontal Analysis

Regardless of how useful trend analysis may be, it is regularly criticized.

One reason is that analysts can choose a base year where the company's performance was poor and base their analysis on it. In this way, the current accounting period (or any other accounting period) can be made to appear better.

Another problem with horizontal analysis is that some companies change the way they present information in their financial statements. This can create difficulties in detecting troublesome areas, making it hard to spot changes in trends.

Horizontal Analysis: Discussion

To conclude, it is always worth performing horizontal analysis, but it should never be relied upon too heavily. Other factors should also be considered, and only then should a decision be made.

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Horizontal Analysis of Financial Statements | Definition and Examples

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Horizontal analysis is an approach to analyzing financial statements . It compares historical data, which includes ratios and line items, over a series of accounting periods. The accounting period can be a month, a quarter, or a year. This method of analysis is also known as trend analysis.

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Horizontal Analysis - Overview, Key Metrics, Example (corporatefinanceinstitute.com)

I like how this site gives you a brief disruption along with key metrics, examples, and drawbacks. With this you have some of all the information on one page without having to flip from one to another. Yes, it's good to keep doing your research but it is also helpful to have it in one spot if possible.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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Horizontal Analysis - Jessica Ayala-Vargas

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Horizontal Analysis - Jessica Ayala-Vargas

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Link: Horizontal Analysis: What It Is vs. Vertical Analysis (investopedia.com)

The horizontal analysis is a method of financial statement analysis that involves comparing historical data.  This can include ratios or line items over a number of accounting periods. Horizontal analysis informs investors and analysts to see what is actually helping the financial performance of the business over years and to help point out any trends and growth patterns. A horizontal analysis is achieved by following three simple steps. Step one you gather the financial information, step two determine comparison methods and step three identify trends and patterns. Horizontal analysis is used to look everything per line in order to see account balance changes for specific accounting periods. This analysis is usually used by management to drive strategic decision-making.

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Horizontal, or trend, analysis is used to spot and evaluate trends over a specific period of time. For instance, instead of creating a balance sheet or income statement for one specific period of time, you would also create a comparative income statement or balance sheet that covers quarterly or annual activity for your business.

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A Beginner’s Guide to Horizontal Analysis

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Horizontal analysis compares financial statements to get an in-depth look at financial performance. Here's how horizontal analysis can help you spot key trends.

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Horizontal analysis is an approach to analyzing financial statements. Accounting period can be a month, quarter, or year. They are used to identify changes in financial statements as well as asses those changes. It makes it easier to be able to spot patterns and trends over the years. Can use in conjunction with balance sheets and income statements. You are able to detect when a business is underperforming. Stakeholders and investors are able to see how the company's performing financially. This link I would recommend because it had a lot of information about horizontal analysis. It also gave many examples when explaining all the information you can get from one.

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Horizontal analysis is an approach to analyzing financial statements.

It compares historical data, which includes ratios and line items, over a series of accounting periods. The accounting period can be a month, a quarter, or a year.

This method of analysis is also known as trend analysis.

The horizontal method of analysis is used to identify changes in financial statements over time and assess those changes.

A base year is initially selected as a benchmark. Either the data of the rest of the years is expressed as a percentage of the base year or an absolute comparison is performed. The base year comparison is known as base year analysis.

This method of analysis makes it easy for the financial statement user to spot patterns and trends over the years.

An absolute comparison involves comparing the amount of the same line of the item to its amounts in the other accounting periods. For example, comparing the accounts receivables of one year to those of the previous year. Any changes are analyzed then.

In percentage comparison, the increase or decrease in amounts is expressed as a percentage of the amount in the base year.

For example, if the base year amount of cash is $100, a 10% increase would make the current accounting period's amount $110, whereas a 10% decrease would be $90.

Different ratios, such as earnings per share (EPS) or current ratio, are also compared for different accounting periods.

Horizontal Analysis: Explanation

Horizontal analysis focuses on the dollar and percentage changes that occur in specific accounts from year to year.

Determining the percentage change is important because it links the degree of change to the actual amounts involved. In this way, percentage changes are better for comparative purposes with other firms than are actual dollar changes.

For example, a $1 million increase in General Motors' cash balance is likely to represent a much smaller percentage increase than a corresponding $1 million increase in American Motors' cash balance.

To calculate percentage changes, you can use the following formula:
Percentage change = (Amount of dollar change / Base year amount) x 100
The base year is always the first year in the comparison.

For example, suppose that Safeway's total current assets were $1,729,146,000 in 2018 and $1,861,389,000 in 2019. This represents a dollar increase of $132,243,000 and a percentage increase of 7.65%, which is calculated as follows:

Percentage change = ($1,861,389,000 - $1,729,146,000 / 1,729,149,000) x 100
= 7.65%

You can also use horizontal analysis in conjunction with both the balance sheet and the income statement.

In the example shown below, comparative balance sheets and income statements are given for Safeway Stores. The tables show the dollar and percentage changes.

Several interesting balance sheet changes are apparent in the tables below. In 2019, Safeway Stores increased its operating of fixed assets. There were rises of more than 12% in all categories of property other than transport equipment.

This increase in capital expenditures is also reflected on the liability side of the balance sheet. In particular, notes and debentures increased by over 53%.

In this discussion and analysis of operations, Safeway's management noted that the increase was due to a growing trend toward mortgage financing.

Comparative Balance Sheets With Horizontal Analysis

Comparative Income Statements With Horizontal Analysis

Horizontal analysis of income statements also produces worthwhile information.

For example, in Safeway Stores' balance sheets, both sales and the cost of sales increased from 2018 to 2019.

However, the percentage increase in sales was greater than the percentage increase in the cost of sales. This led to an increase in gross profit from 2018 to 2019.

Operating and administrative expenses also increased slightly and interest expense increased by over 12%. This resulted in only a slight increase in net income for 2019 over 2018.

The Usefulness of Horizontal Analysis

Consistency and comparability are generally accepted accounting principles ( GAAP).

Consistency is important when performing horizontal analysis of financial statements. When the same accounting standards are used over the years, the financial statements of the company are easier to compare and trends are easily analyzed.

Comparability means that a company's financial statements can be compared to those of another company in the same industry.

Horizontal analysis enables investors, analysts, and other stakeholders in the company to see how well the company is performing financially.

A company's financial performance over the years is assessed and changes in different line items and ratios are analyzed. Negative changes and trends are further investigated.

Horizontal analysis also makes it easier to detect when a business is underperforming.

For example, if a company starts generating low profits in a particular year, expenses can be analyzed for that year. This makes it easier to spot inefficiencies and specific areas of underperformance.

Ratios such as asset turnover, inventory turnover, and receivables turnover are also important because they help analysts to fully gauge the performance of a business.

For example, a low inventory turnover would imply that sales are low, the company is not selling its inventory, and there is a surplus. This could also be due to poor marketing or excess inventory due to seasonal demand.

Ratios such as earnings per share, return on assets, and return on equity are similarly invaluable. These ratios make problems related to the growth and profitability of a company evident and clear.

Liquidity ratios are needed to check if the company is liquid enough to settle its debts and pay back any liabilities. Horizontal analysis makes it easy to detect these changes and compare growth rates and profitability with other companies in the industry.

Example

Let's take a look at this simple example before we discuss any further.

Each item in a financial statement is compared to the base year. In this case, if management compares direct sales between 2007 and 2006 (the base year), it is clear that there is an increase of 3.2%.

This result would be concerning for the company's management. They would investigate this if they expected at least a 10% increase.

To provide another example, consider an investor who is seeking to invest and finds company C. Company C's figures for the previous year are as follows: net income $2m and retained earnings $10m.

The current year's details are the following: net income $4m and retained earnings $12m. Net income has grown by 100% and retained earnings have increased by only 20%.

The investor now needs to make a decision based on their analysis of the figures, as well as a comparison to other similar figures.

Criticisms of Horizontal Analysis

Regardless of how useful trend analysis may be, it is regularly criticized.

One reason is that analysts can choose a base year where the company's performance was poor and base their analysis on it. In this way, the current accounting period (or any other accounting period) can be made to appear better.

Another problem with horizontal analysis is that some companies change the way they present information in their financial statements. This can create difficulties in detecting troublesome areas, making it hard to spot changes in trends.

Horizontal Analysis: Discussion

To conclude, it is always worth performing horizontal analysis, but it should never be relied upon too heavily. Other factors should also be considered, and only then should a decision be made.

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Horizontal Analysis of Financial Statements | Definition and Examples

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Horizontal analysis is an approach to analyzing financial statements . It compares historical data, which includes ratios and line items, over a series of accounting periods. The accounting period can be a month, a quarter, or a year. This method of analysis is also known as trend analysis.

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I used this link because it breaks down what the Horizontal Analysis is and how to recognize and formulate trends over the years. The horizontal analysis uses income or balance sheet to keep track of financials over a set period of time usually within years. Without the horizontal analysis putting these increases and decreases on display it would take longer to judge a company's standings.

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Financial analysis is a technique, skill, and concept that assists professionals in numerous industries. For example, government/regulatory, personal investors, managers, creditors, and many more. To accomplish your company's mission, a financial analysis may play an integral part. How can you get better? Let's cover a few basics:

Foremost, what does financial analysis mean? Financial statement analysis is the process a financial professional goes through to analyze a company's financial documents to make an informed decision about that business. However, financial analysis comes in many sizes, shapes, and forms. In the image below, you can see a small sample of many of the popular financial analysis methods. In this article, I want to cover vertical analysis, horizontal analysis, and ratio analysis. Again, as the title suggests, we are covering some basics.

Companies produce financial statements. The financial statements tell a story to its intended audience. The most common types of financial statements that you may encounter include, balance sheets, income statements, and cash flow statements. The data contained within the previously mentioned statements will vary; the financial documents are designed to look at the health of the company. These financial statements are essential to monitoring a company's performance over time; as well as monitoring a company's progress toward accomplishing its mission, goals, plans, and strategic initiatives.

Horizontal Analysis: A horizontal analysis identifies trends and pinpoints relationships between items that appear in the same row of a comparative statement. For example, in below to see the side-by-side or horizontal changes in the Revenue and COGS. Horizontal analysis can be carried out in terms of changes in dollar amounts, in percentages of change, or in a ratio format. The horizontal analysis may be conducted for the balance sheet, income statement, schedules of current and fixed assets, and statement of retained earnings.
Figure 1
Vertical Analysis: Vertical analysis requires you to convert the information in financial statements columns to percentages. These conversions will show the significance of the items and help with the comparison. On the balance sheet, individual assets can be expressed in terms of their relationship to total assets. Liabilities and shareholders' equity accounts can be expressed in terms of their relationship to the total liabilities and shareholders' equity. On the income statement, each item is stated as a percentage of sales. In below, you can see a brief example of a vertical analysis.
Figure 2
Ratio Analysis: A ratio is an expression of a mathematical relationship between a piece of information. For a ratio to work well, the element which constitutes the ratio must express a meaningful relationship. Ratio analysis can disclose relationships that reveal conditions and trends. Typical ratios are fractions usually expressed in percent or times. For example, in below, you can easily and quickly see the percentage differences; therefore, allowing you to make informed decisions.
Figure 3
References
Corporate Finance for Dummies
Thanks for reading! If you are interested in learning more about financial analysis, please reach out to me. I am more than happy to share some really good YouTube videos, books for reference, and further education opportunities to help.

: Jason is the Chief of Licensing, Small Business Investment Companies (SBIC) Program, Office of Investment and Innovation, U.S. Small Business Administration. Prior to the #SBIC Program, Jason spent ten years as a federal agent investigating complex financial crimes. Also, Jason is an adjunct professor of finance at the Jack Welch Management Institute (JWMI) and the Columbia College of Missouri. Jason is an MBA, CFA, and CFE. Jason is also entering the final leg of his Ph.D. in Business with dissertation research in corporate reputational risk.

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Financial analysis is a technique, skill, and concept that assists professionals in numerous industries. For example, government/regulatory, personal investors, managers, creditors, and many more.

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I would recommend this website to someone who is wanting to learn about horizontal analysis. The reason i would recommend this website is because they give clear definitions to help you understand horizontal analysis. They also give you key metrics and good examples with a visual picture of the equation to calculate horizontal analysis.

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period

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This video gave examples and explains the reason and purpose for a horizontal analysis. The video gives examples of how to view the information presented over specific periods of time that is organized in a horizontal line and gives examples of how that information can be analyzed on statements using both trends and percentages, it's clear and simple to understand.

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Horizontal Analysis | Financial Statement Analysis

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Horizontal analysis is used to spot and evaluate trends over time. The horizontal analysis uses a line-by-line comparison to compare the totals. Horizontal analysis allows you to compare revenue totals for both years to see if they increased, decreased, or remained relatively stagnant. There are 3 different steps on how to perform a horizontal analysis. Step 1: Compare two periods on an income statement, balance sheet, etc. Step 2: Decide how you want to approach the analysis ( Direct Comparison, Variance, and Percentage), and lately, review the results. The horizontal analysis will answer questions such as how much revenue increased in the quarter, are the cost of goods sold increased or decreased, what are dramatic changes that accused and net income if its increasing and decreasing.

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We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner.

Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods. Horizontal analysis can be used with an income statement or a balance sheet.

At least two accounting periods are required for a valid comparison, though in order to spot actual trends, it's better to include three or more accounting periods when calculating horizontal analysis.

How detailed your initial financial statements are depends largely on the accounting software application you're using. If you're using an entry-level application, it's likely you'll need to use spreadsheets in order to complete the horizontal analysis.

Overview: What is horizontal analysis?

Horizontal, or trend, analysis is used to spot and evaluate trends over a specific period of time.

For instance, instead of creating a balance sheet or income statement for one specific period of time, you would also create a comparative income statement or balance sheet that covers quarterly or annual activity for your business.

The comparative statement is then used to highlight any increases or decreases over that specific time frame. This enables you to easily spot growth trends as well as any red flags that may need to be addressed.

Horizontal analysis uses a line-by-line comparison to compare the totals. For example, if you run a comparative income statement for 2018 and 2019, horizontal analysis allows you to compare revenue totals for both years to see if it increased, decreased, or remained relatively stagnant.

Adding a third year to the analysis will be even more helpful, as you'll be able to see if there is a definite trend.

Horizontal analysis vs. vertical analysis: What's the difference?

Horizontal analysis looks at changes line by line between specific accounting periods, usually quarterly or yearly, whereas vertical analysis restates balance sheet or income statement amounts as a percentage of total assets (balance sheet) or net sales (income statement).

While horizontal analysis is used to compare line items over specific periods of time in order to spot trends, vertical analysis is used to restate and compare changes in percentages, and is more frequently used by investors and creditors to compare company performance with other companies in the same industry.

How to perform a horizontal analysis

Use the following steps to begin performing a horizontal analysis:

Step 1: Run a comparative income statement and balance sheet for the periods you wish to compare. You'll need a minimum of two periods to compare, but you'll be able to spot trends much better if you use at least three periods.

Step 2: Decide how you want to approach your horizontal analysis. You have several options:

Direct comparison: The direct comparison is simply comparing the results of one accounting period to another. For example, if your 2018 revenue was $20,000 and your 2019 revenue was $27,000, the difference would be $7,000. The comparison method allows you to quickly view any changes from period to period, and whether those changes are beneficial or require further research.

Variance: You can choose to calculate the variance between your chosen periods to determine whether the impact was positive or negative. The variance method is particularly helpful when the horizontal analysis is being used to determine the financial health of your business by those outside the business, such as investors and creditors.

Percentage: The percentage method is helpful if you're looking for more in-depth analysis. Using the percentage method, the first period of your income statement or balance sheet is considered your base period, with each subsequent period comparing line-by-line results to the base year. For example, in the income statement below, the difference in revenue between 2017 and 2018 is $13,000, so you would use the following horizontal analysis formula to determine the percentage by which revenue increased:

$13,000 ÷ $54,000 x 100 = 24%
That means that from 2017 to 2018, your revenue increased by 24%.

To compare 2019 revenue to 2017 revenue, you'll complete the following calculations:
$73,000 - $54,000 = $19,000 variance $19,000 ÷ $54,000 x 100 = 35% increase in revenue
You can also choose to calculate income statement ratios such as gross margin and profit margin.
Horizontal Analysis - Income Statement
Step 3: Review your results. The quickest way to spot trends is to view the changes from period to period, but for more substantial analysis, you'll want to view variances, either as dollar amounts or percentages.

If you'd rather see both variances and percentages, you can add columns in order to display changes in both. While this format takes the most time to create, it also makes it easier to spot trends and better analyze business performance. This method works best when you're comparing two years side by side.
Horizontal Analysis - Income Statement
Using the comparative income statement above, you can see that your net income changed by $1,500 from 2017; a percentage increase of 5.3%, but what really stands out on the income statement is the 266% increase in depreciation expense.

If you purchased several fixed assets during 2018, the increase is easily explained, but if you didn't, this would need to be researched.

Calculating the horizontal analysis of a balance sheet is a similar process. You can choose to run a comparative balance sheet for the periods desired, or complete a side-by-side comparison of two years.

The example from Safeway Stores shows a comparative balance sheet for 2018 and 2019 following a similar format to the income statement above.

Horizontal analysis helps you spot trends

While financial statements are essential for managing your business, an income statement or balance sheet for a single period of time will not tell the complete story. Horizontal analysis answers a lot of questions, including:

How much has my revenue increased in the last quarter/year?

Is my cost of goods sold going up or down?

What areas of my business have seen the most changes?

Is my net income increasing or decreasing?

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.

Whether you do a horizontal analysis quarterly or yearly, it's worth the time and effort to perform this calculation regularly.

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A Beginner's Guide to Horizontal Analysis

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We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner. Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods.

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Horizontal Analysis Research-Debresia Ratelis 

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Horizontal Analysis Research-Debresia Ratelis 

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Horizontal analysis or trend analysis is used to spot financial trends over a specific number of accounting periods. Horizontal analysis can be used with an income statement or a balance sheet. How it works is you would create a comparative income statement or balance sheet that covers quarterly or annual activity for your business instead of making them for one specific period. This statement is used to highlight any expansions or reductions over that specific time frame. Horizontal analysis uses line-by-line comparison to compare the totals. Horizontal analysis helps you spot trends by answering questions income.

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We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner.

Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods. Horizontal analysis can be used with an income statement or a balance sheet.

At least two accounting periods are required for a valid comparison, though in order to spot actual trends, it's better to include three or more accounting periods when calculating horizontal analysis.

How detailed your initial financial statements are depends largely on the accounting software application you're using. If you're using an entry-level application, it's likely you'll need to use spreadsheets in order to complete the horizontal analysis.

Overview: What is horizontal analysis?

Horizontal, or trend, analysis is used to spot and evaluate trends over a specific period of time.

For instance, instead of creating a balance sheet or income statement for one specific period of time, you would also create a comparative income statement or balance sheet that covers quarterly or annual activity for your business.

The comparative statement is then used to highlight any increases or decreases over that specific time frame. This enables you to easily spot growth trends as well as any red flags that may need to be addressed.

Horizontal analysis uses a line-by-line comparison to compare the totals. For example, if you run a comparative income statement for 2018 and 2019, horizontal analysis allows you to compare revenue totals for both years to see if it increased, decreased, or remained relatively stagnant.

Adding a third year to the analysis will be even more helpful, as you'll be able to see if there is a definite trend.

Horizontal analysis vs. vertical analysis: What's the difference?

Horizontal analysis looks at changes line by line between specific accounting periods, usually quarterly or yearly, whereas vertical analysis restates balance sheet or income statement amounts as a percentage of total assets (balance sheet) or net sales (income statement).

While horizontal analysis is used to compare line items over specific periods of time in order to spot trends, vertical analysis is used to restate and compare changes in percentages, and is more frequently used by investors and creditors to compare company performance with other companies in the same industry.

How to perform a horizontal analysis

Use the following steps to begin performing a horizontal analysis:

Step 1: Run a comparative income statement and balance sheet for the periods you wish to compare. You'll need a minimum of two periods to compare, but you'll be able to spot trends much better if you use at least three periods.

Step 2: Decide how you want to approach your horizontal analysis. You have several options:

Direct comparison: The direct comparison is simply comparing the results of one accounting period to another. For example, if your 2018 revenue was $20,000 and your 2019 revenue was $27,000, the difference would be $7,000. The comparison method allows you to quickly view any changes from period to period, and whether those changes are beneficial or require further research.

Variance: You can choose to calculate the variance between your chosen periods to determine whether the impact was positive or negative. The variance method is particularly helpful when the horizontal analysis is being used to determine the financial health of your business by those outside the business, such as investors and creditors.

Percentage: The percentage method is helpful if you're looking for more in-depth analysis. Using the percentage method, the first period of your income statement or balance sheet is considered your base period, with each subsequent period comparing line-by-line results to the base year. For example, in the income statement below, the difference in revenue between 2017 and 2018 is $13,000, so you would use the following horizontal analysis formula to determine the percentage by which revenue increased:

$13,000 ÷ $54,000 x 100 = 24%
That means that from 2017 to 2018, your revenue increased by 24%.

To compare 2019 revenue to 2017 revenue, you'll complete the following calculations:
$73,000 - $54,000 = $19,000 variance $19,000 ÷ $54,000 x 100 = 35% increase in revenue
You can also choose to calculate income statement ratios such as gross margin and profit margin.
Horizontal Analysis - Income Statement
Step 3: Review your results. The quickest way to spot trends is to view the changes from period to period, but for more substantial analysis, you'll want to view variances, either as dollar amounts or percentages.

If you'd rather see both variances and percentages, you can add columns in order to display changes in both. While this format takes the most time to create, it also makes it easier to spot trends and better analyze business performance. This method works best when you're comparing two years side by side.
Horizontal Analysis - Income Statement
Using the comparative income statement above, you can see that your net income changed by $1,500 from 2017; a percentage increase of 5.3%, but what really stands out on the income statement is the 266% increase in depreciation expense.

If you purchased several fixed assets during 2018, the increase is easily explained, but if you didn't, this would need to be researched.

Calculating the horizontal analysis of a balance sheet is a similar process. You can choose to run a comparative balance sheet for the periods desired, or complete a side-by-side comparison of two years.

The example from Safeway Stores shows a comparative balance sheet for 2018 and 2019 following a similar format to the income statement above.

Horizontal analysis helps you spot trends

While financial statements are essential for managing your business, an income statement or balance sheet for a single period of time will not tell the complete story. Horizontal analysis answers a lot of questions, including:

How much has my revenue increased in the last quarter/year?

Is my cost of goods sold going up or down?

What areas of my business have seen the most changes?

Is my net income increasing or decreasing?

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.

Whether you do a horizontal analysis quarterly or yearly, it's worth the time and effort to perform this calculation regularly.

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A Beginner's Guide to Horizontal Analysis

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We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner. Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods.

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Horizontal Analysis is used to spot and evaluate trends over a specific period of time. It uses a line-by-line comparison to compare the totals. They explain in depth on how to do a horizontal analysis. They explain it by steps. In step one they say you need to run a comparative income statement and balance sheet for the periods you wish to compare. The second step you will decide how you wan to approach it with the following options direct comparison, variance, and percentage. Then step three you will review your results. They also talk about how the horizontal analysis helps you spot trends. Also that the quickest ways to spot trends is to view the changes from period to period. The great thing about this resource is that they go into depth about how to perform one and they provide visuals. They also explain what exactly a horizontal analysis is.

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We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner.

Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods. Horizontal analysis can be used with an income statement or a balance sheet.

At least two accounting periods are required for a valid comparison, though in order to spot actual trends, it's better to include three or more accounting periods when calculating horizontal analysis.

How detailed your initial financial statements are depends largely on the accounting software application you're using. If you're using an entry-level application, it's likely you'll need to use spreadsheets in order to complete the horizontal analysis.

Overview: What is horizontal analysis?

Horizontal, or trend, analysis is used to spot and evaluate trends over a specific period of time.

For instance, instead of creating a balance sheet or income statement for one specific period of time, you would also create a comparative income statement or balance sheet that covers quarterly or annual activity for your business.

The comparative statement is then used to highlight any increases or decreases over that specific time frame. This enables you to easily spot growth trends as well as any red flags that may need to be addressed.

Horizontal analysis uses a line-by-line comparison to compare the totals. For example, if you run a comparative income statement for 2018 and 2019, horizontal analysis allows you to compare revenue totals for both years to see if it increased, decreased, or remained relatively stagnant.

Adding a third year to the analysis will be even more helpful, as you'll be able to see if there is a definite trend.

Horizontal analysis vs. vertical analysis: What's the difference?

Horizontal analysis looks at changes line by line between specific accounting periods, usually quarterly or yearly, whereas vertical analysis restates balance sheet or income statement amounts as a percentage of total assets (balance sheet) or net sales (income statement).

While horizontal analysis is used to compare line items over specific periods of time in order to spot trends, vertical analysis is used to restate and compare changes in percentages, and is more frequently used by investors and creditors to compare company performance with other companies in the same industry.

How to perform a horizontal analysis

Use the following steps to begin performing a horizontal analysis:

Step 1: Run a comparative income statement and balance sheet for the periods you wish to compare. You'll need a minimum of two periods to compare, but you'll be able to spot trends much better if you use at least three periods.

Step 2: Decide how you want to approach your horizontal analysis. You have several options:

Direct comparison: The direct comparison is simply comparing the results of one accounting period to another. For example, if your 2018 revenue was $20,000 and your 2019 revenue was $27,000, the difference would be $7,000. The comparison method allows you to quickly view any changes from period to period, and whether those changes are beneficial or require further research.

Variance: You can choose to calculate the variance between your chosen periods to determine whether the impact was positive or negative. The variance method is particularly helpful when the horizontal analysis is being used to determine the financial health of your business by those outside the business, such as investors and creditors.

Percentage: The percentage method is helpful if you're looking for more in-depth analysis. Using the percentage method, the first period of your income statement or balance sheet is considered your base period, with each subsequent period comparing line-by-line results to the base year. For example, in the income statement below, the difference in revenue between 2017 and 2018 is $13,000, so you would use the following horizontal analysis formula to determine the percentage by which revenue increased:

$13,000 ÷ $54,000 x 100 = 24%
That means that from 2017 to 2018, your revenue increased by 24%.

To compare 2019 revenue to 2017 revenue, you'll complete the following calculations:
$73,000 - $54,000 = $19,000 variance $19,000 ÷ $54,000 x 100 = 35% increase in revenue
You can also choose to calculate income statement ratios such as gross margin and profit margin.
Horizontal Analysis - Income Statement
Step 3: Review your results. The quickest way to spot trends is to view the changes from period to period, but for more substantial analysis, you'll want to view variances, either as dollar amounts or percentages.

If you'd rather see both variances and percentages, you can add columns in order to display changes in both. While this format takes the most time to create, it also makes it easier to spot trends and better analyze business performance. This method works best when you're comparing two years side by side.
Horizontal Analysis - Income Statement
Using the comparative income statement above, you can see that your net income changed by $1,500 from 2017; a percentage increase of 5.3%, but what really stands out on the income statement is the 266% increase in depreciation expense.

If you purchased several fixed assets during 2018, the increase is easily explained, but if you didn't, this would need to be researched.

Calculating the horizontal analysis of a balance sheet is a similar process. You can choose to run a comparative balance sheet for the periods desired, or complete a side-by-side comparison of two years.

The example from Safeway Stores shows a comparative balance sheet for 2018 and 2019 following a similar format to the income statement above.

Horizontal analysis helps you spot trends

While financial statements are essential for managing your business, an income statement or balance sheet for a single period of time will not tell the complete story. Horizontal analysis answers a lot of questions, including:

How much has my revenue increased in the last quarter/year?

Is my cost of goods sold going up or down?

What areas of my business have seen the most changes?

Is my net income increasing or decreasing?

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.

Whether you do a horizontal analysis quarterly or yearly, it's worth the time and effort to perform this calculation regularly.

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A Beginner's Guide to Horizontal Analysis

# data[].attributes.attachment_link.description
We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner. Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods.

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The horizontal analysis uses income statements and balance sheets to compare data over time. It analyzes over the years the absolute change. In all, it basically just shows a trend of a company's financial reporting. This website showed step by step how to use the equation and how to even work on excel. This is very helpful since some people do not know how to use excel. Anyways, the horizontal analysis is a good way to show patterns or bumps in a company's financial history over the years.

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Horizontal Analysis Formula (Table of Contents)
What is the Horizontal Analysis Formula?

The term "Horizontal Analysis" refers to the financial statement analysis in historical data from the income statement, balance sheet, and cash flow statement is compared with each other. In other words, it indicates the change either in absolute terms or as a percentage change year over year (Y-o-Y) in each of the line items. The formula for horizontal analysis (absolute terms) can be derived by deducting the amount in the base year from the amount in the comparison year. Mathematically, it is represented as,
Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year
The formula for horizontal analysis (% change) can be derived by dividing the difference between the amount in the comparison year and the base year's amount in the base year. Mathematically, it is represented as,
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Example of Horizontal Analysis Formula (With Excel Template)

Let's take an example to understand the calculation of Horizontal Analysis in a better manner.

Example #1
Let us take the example of a company named ASD Inc., which is a manufacturer of precision components for tier I OEMs. From its latest annual report, the following income statement is available: Solution:
Horizontal Analysis is calculated using the formula given below
Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year
Similarly, Calculated for below

Horizontal Analysis is calculated using the formula given below
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Similarly, Calculated for below

In the above table, it can be seen that:

The percentage change in gross profit has been relatively higher than that of net sales due to a lower increase in the cost of goods sold.

Further, operating income and net income have also witnessed higher growth due to a lower increase in SG&A expense and income tax respectively.

Example #2

Gross Profit is Calculated as
Let us take the annual report of Apple Inc. for the year 2018 to illustrate the financial statement's preparation of horizontal analysis. In this case, we will be using the income statement and accordingly, the following information has been extracted from the annual report:
Similarly Calculated For Years 2017 and 2016.
Solution:
Operating Income is Calculated as

Similarly Calculated For Years 2017 and 2016.

Net Income is calculated as

Similarly Calculated For Years 2017 and 2016.

Horizontal Analysis is calculated using the formula given below

Similarly, Calculated for below

Similarly, Calculated for the year 2017

Similarly, Calculated for below
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Conduct a horizontal analysis of Apple Inc.'s income statement and provide your insights on the same.

The overall growth has been relatively higher in the year 2018 compared to that of the year 2017. Nevertheless, it indicates that the company has witnessed continuous growth in the last two years.

Further, it is also noticed that the operating income moves in tandem with the revenue growth, which is a good sign.

Source Link: Apple Inc. Balance Sheet

Explanation

The formula for Horizontal Analysis can be calculated by using the following steps:

Step 1: Firstly, note the line item's amount in the base year from the financial statement.

Step 2: Next, note the amount of the line item in the comparison year.

Step 3: Now, the formula for in absolute terms can be derived by deducting the amount in the base year (step 1) from the amount in comparison year (step 2), as shown below.

Step 4: Finally, the formula for horizontal analysis in percentage can be derived by dividing the difference between the amount in the comparison year and the amount in the base year (step 3) by the amount in the base year (step 1), as shown below.

Relevance and Use of Horizontal Analysis Formula

It is important to understand the concept of horizontal analysis because of the following reasons. It helps in determining the trend in each line item Y-o-Y. Any stark deviation in trend may be an indication of some anomaly in reporting that requires immediate investigation. It can be used to assess the performance of a company over a period of time. This analysis technique can provide an overall picture of where the subject company stands in terms of financial matters.

Horizontal Analysis Formula Calculator

You can use the following Horizontal Analysis Formula Calculator

Recommended Articles

This is a guide to Horizontal Analysis Formula. Here we discuss how to calculate the Horizontal Analysis along with practical examples. We also provide a Horizontal Analysis calculator with a downloadable excel template. You may also look at the following articles to learn more -

1. Cost-Benefit Analysis Formula

2. Break Even Analysis Formula

3. Vertical Analysis of Income Statement

4. Variance Analysis Formula

5. Different Types of Balance Sheet Ratios

Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year)/ Amount in Base Year]* 100

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Horizontal Analysis Formula | Calculator (Example with Excel Template)

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Horizontal Analysis Formula (Table of Contents) The term "Horizontal Analysis" refers to the financial statement analysis in historical data from the income statement, balance sheet, and cash flow statement is compared with each other.

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Horizontal Analysis Research - Maria Petrovic

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Horizontal Analysis Research - Maria Petrovic

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Upon conducting my research on Horizontal Analysis, I came across several useful online resources. I ultimately chose Investopedia.com as it provides the greatest level of information on this subject and breaks it down in an easy-to-understand manner. This website has also been my go-to source of information for business and accounting related projects I have worked on in the past. Investopedia.com describes Horizontal Analysis as a method of comparing a company’s financial statement data over multiple accounting periods. Analysts utilize Horizontal Analysis to evaluate past performance of a company along with its current financial standing which allows them to easily spot trends and growth patterns as well as make comparisons with competitors in the same industry. Investors also review the same data to determine whether it is worth investing in that company. Horizontal Analysis is performed as follows: First, choose a line item, account balance, or ratio that you want to analyze. Next, pick a base year and compare the dollar and percent change to subsequent years with the base year by subtracting the base year amount from the comparison year amount. Third, calculate the percentage change by first dividing the dollar amount difference between the comparison year and the base year by the base year dollar amount, multiplying the quotient by 100.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis. Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

Horizontal Analysis FAQs

How Is Horizontal Analysis Performed?

To perform a horizontal analysis:

1. Choose a line item, account balance, or ratio that you want to analyze.

2. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.

3. Calculate thepercentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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Horizontal Analysis- Elixsandra Escobar 

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Horizontal Analysis- Elixsandra Escobar 

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While I researched the website, I thought this website had the most valuable information about Horizontal analysis. Horizontal analysis is used when analyzing a company’s financial statements over many multiple periods. It compares data, meaning ratios or line items. Now I did not know much information about what exactly a horizontal analysis was before taking this class. The question is how horizontal analysis work does, it allows investors & analysts to see what drives a company’s growth and performance. This type of analysis shows the changes from base period in dollar & percent%. This change is calculated by dividing the dollar change between the year that it is compared and the base year by the ratio. So, you pick the percent change then divide it by the dollar change that is chosen between the comparison year and the base year by the ratio and then that is when you multiply it by 100.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis. Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

Horizontal Analysis FAQs

How Is Horizontal Analysis Performed?

To perform a horizontal analysis:

1. Choose a line item, account balance, or ratio that you want to analyze.

2. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.

3. Calculate thepercentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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Horizontal Analysis- Madaline Schumacher 

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Horizontal Analysis- Madaline Schumacher 

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I chose this blog because it was titled "A Beginner's Guide to Horizontal Analysis", and I personally have never heard of the subject so wanted a simple setup to follow. Horizontal analysis, or trend analysis, is a way to view financial trends over a specific amount (min. 2) of accounting periods. You would use an income statement or balance sheet to complete this analysis. Using the comparative sheets showing quarterly, or annually what a company's finances look like, you can spot and evaluate the trends to notice increases or decreases over that time frame. It uses line-by-line comparison to compare the totals to see things such as how much has revenue increased, if the cost of goods sold is up or down, what areas is the business seeing the most changes, and how net income is increasing or decreasing. Overall, this analysis is very important for businesses to complete regularly.

# data[].attributes.attachment_link.readable_text
We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner.

Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods. Horizontal analysis can be used with an income statement or a balance sheet.

At least two accounting periods are required for a valid comparison, though in order to spot actual trends, it's better to include three or more accounting periods when calculating horizontal analysis.

How detailed your initial financial statements are depends largely on the accounting software application you're using. If you're using an entry-level application, it's likely you'll need to use spreadsheets in order to complete the horizontal analysis.

Overview: What is horizontal analysis?

Horizontal, or trend, analysis is used to spot and evaluate trends over a specific period of time.

For instance, instead of creating a balance sheet or income statement for one specific period of time, you would also create a comparative income statement or balance sheet that covers quarterly or annual activity for your business.

The comparative statement is then used to highlight any increases or decreases over that specific time frame. This enables you to easily spot growth trends as well as any red flags that may need to be addressed.

Horizontal analysis uses a line-by-line comparison to compare the totals. For example, if you run a comparative income statement for 2018 and 2019, horizontal analysis allows you to compare revenue totals for both years to see if it increased, decreased, or remained relatively stagnant.

Adding a third year to the analysis will be even more helpful, as you'll be able to see if there is a definite trend.

Horizontal analysis vs. vertical analysis: What's the difference?

Horizontal analysis looks at changes line by line between specific accounting periods, usually quarterly or yearly, whereas vertical analysis restates balance sheet or income statement amounts as a percentage of total assets (balance sheet) or net sales (income statement).

While horizontal analysis is used to compare line items over specific periods of time in order to spot trends, vertical analysis is used to restate and compare changes in percentages, and is more frequently used by investors and creditors to compare company performance with other companies in the same industry.

How to perform a horizontal analysis

Use the following steps to begin performing a horizontal analysis:

Step 1: Run a comparative income statement and balance sheet for the periods you wish to compare. You'll need a minimum of two periods to compare, but you'll be able to spot trends much better if you use at least three periods.

Step 2: Decide how you want to approach your horizontal analysis. You have several options:

Direct comparison: The direct comparison is simply comparing the results of one accounting period to another. For example, if your 2018 revenue was $20,000 and your 2019 revenue was $27,000, the difference would be $7,000. The comparison method allows you to quickly view any changes from period to period, and whether those changes are beneficial or require further research.

Variance: You can choose to calculate the variance between your chosen periods to determine whether the impact was positive or negative. The variance method is particularly helpful when the horizontal analysis is being used to determine the financial health of your business by those outside the business, such as investors and creditors.

Percentage: The percentage method is helpful if you're looking for more in-depth analysis. Using the percentage method, the first period of your income statement or balance sheet is considered your base period, with each subsequent period comparing line-by-line results to the base year. For example, in the income statement below, the difference in revenue between 2017 and 2018 is $13,000, so you would use the following horizontal analysis formula to determine the percentage by which revenue increased:

$13,000 ÷ $54,000 x 100 = 24%
That means that from 2017 to 2018, your revenue increased by 24%.

To compare 2019 revenue to 2017 revenue, you'll complete the following calculations:
$73,000 - $54,000 = $19,000 variance $19,000 ÷ $54,000 x 100 = 35% increase in revenue
You can also choose to calculate income statement ratios such as gross margin and profit margin.
Horizontal Analysis - Income Statement
Step 3: Review your results. The quickest way to spot trends is to view the changes from period to period, but for more substantial analysis, you'll want to view variances, either as dollar amounts or percentages.

If you'd rather see both variances and percentages, you can add columns in order to display changes in both. While this format takes the most time to create, it also makes it easier to spot trends and better analyze business performance. This method works best when you're comparing two years side by side.
Horizontal Analysis - Income Statement
Using the comparative income statement above, you can see that your net income changed by $1,500 from 2017; a percentage increase of 5.3%, but what really stands out on the income statement is the 266% increase in depreciation expense.

If you purchased several fixed assets during 2018, the increase is easily explained, but if you didn't, this would need to be researched.

Calculating the horizontal analysis of a balance sheet is a similar process. You can choose to run a comparative balance sheet for the periods desired, or complete a side-by-side comparison of two years.

The example from Safeway Stores shows a comparative balance sheet for 2018 and 2019 following a similar format to the income statement above.

Horizontal analysis helps you spot trends

While financial statements are essential for managing your business, an income statement or balance sheet for a single period of time will not tell the complete story. Horizontal analysis answers a lot of questions, including:

How much has my revenue increased in the last quarter/year?

Is my cost of goods sold going up or down?

What areas of my business have seen the most changes?

Is my net income increasing or decreasing?

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.

Whether you do a horizontal analysis quarterly or yearly, it's worth the time and effort to perform this calculation regularly.

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A Beginner's Guide to Horizontal Analysis

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We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner. Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods.

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I really like investopedia when it comes to researching business related subjects. I think it did a great job explaining in detail what horizontal analysis is and what it is used for. I learned that it is looking at a business over the course of a time period such as years and comparing the numbers. It uses information from a companies balance sheet, income statement, and other financial statements to analyze trends over the time periods. It gives you the ability to see problem areas and make predictions.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis. Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

Horizontal Analysis FAQs

How Is Horizontal Analysis Performed?

To perform a horizontal analysis:

1. Choose a line item, account balance, or ratio that you want to analyze.

2. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.

3. Calculate thepercentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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Horizontal Analysis evaluates the trends of a business over a specific time period. It can be one quarter of a year vs. another, or one year vs. another. Horizontal Analysis uses the balance sheet or income statement of a business. These sites broke down the what Horizontal Analysis is and how it is used. There is even a short video in one.
https://www.investopedia.com/terms/h/horizontalanalysis.asp

https://www.investopedia.com/terms/h/horizontalanalysis.asp

https://thebusinessprofessor.com/en_US/accounting-taxation-and-reporting-managerial-amp-financial-accounting-amp-reporting/horizontal-analysis-definition

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Horizontal Analysis Formula (Table of Contents)
What is the Horizontal Analysis Formula?

The term "Horizontal Analysis" refers to the financial statement analysis in historical data from the income statement, balance sheet, and cash flow statement is compared with each other. In other words, it indicates the change either in absolute terms or as a percentage change year over year (Y-o-Y) in each of the line items. The formula for horizontal analysis (absolute terms) can be derived by deducting the amount in the base year from the amount in the comparison year. Mathematically, it is represented as,
Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year
The formula for horizontal analysis (% change) can be derived by dividing the difference between the amount in the comparison year and the base year's amount in the base year. Mathematically, it is represented as,
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Example of Horizontal Analysis Formula (With Excel Template)

Let's take an example to understand the calculation of Horizontal Analysis in a better manner.

Example #1
Let us take the example of a company named ASD Inc., which is a manufacturer of precision components for tier I OEMs. From its latest annual report, the following income statement is available: Solution:
Horizontal Analysis is calculated using the formula given below
Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year
Similarly, Calculated for below

Horizontal Analysis is calculated using the formula given below
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Similarly, Calculated for below

In the above table, it can be seen that:

The percentage change in gross profit has been relatively higher than that of net sales due to a lower increase in the cost of goods sold.

Further, operating income and net income have also witnessed higher growth due to a lower increase in SG&A expense and income tax respectively.

Example #2

Gross Profit is Calculated as
Let us take the annual report of Apple Inc. for the year 2018 to illustrate the financial statement's preparation of horizontal analysis. In this case, we will be using the income statement and accordingly, the following information has been extracted from the annual report:
Similarly Calculated For Years 2017 and 2016.
Solution:
Operating Income is Calculated as

Similarly Calculated For Years 2017 and 2016.

Net Income is calculated as

Similarly Calculated For Years 2017 and 2016.

Horizontal Analysis is calculated using the formula given below

Similarly, Calculated for below

Similarly, Calculated for the year 2017

Similarly, Calculated for below
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Conduct a horizontal analysis of Apple Inc.'s income statement and provide your insights on the same.

The overall growth has been relatively higher in the year 2018 compared to that of the year 2017. Nevertheless, it indicates that the company has witnessed continuous growth in the last two years.

Further, it is also noticed that the operating income moves in tandem with the revenue growth, which is a good sign.

Source Link: Apple Inc. Balance Sheet

Explanation

The formula for Horizontal Analysis can be calculated by using the following steps:

Step 1: Firstly, note the line item's amount in the base year from the financial statement.

Step 2: Next, note the amount of the line item in the comparison year.

Step 3: Now, the formula for in absolute terms can be derived by deducting the amount in the base year (step 1) from the amount in comparison year (step 2), as shown below.

Step 4: Finally, the formula for horizontal analysis in percentage can be derived by dividing the difference between the amount in the comparison year and the amount in the base year (step 3) by the amount in the base year (step 1), as shown below.

Relevance and Use of Horizontal Analysis Formula

It is important to understand the concept of horizontal analysis because of the following reasons. It helps in determining the trend in each line item Y-o-Y. Any stark deviation in trend may be an indication of some anomaly in reporting that requires immediate investigation. It can be used to assess the performance of a company over a period of time. This analysis technique can provide an overall picture of where the subject company stands in terms of financial matters.

Horizontal Analysis Formula Calculator

You can use the following Horizontal Analysis Formula Calculator

Recommended Articles

This is a guide to Horizontal Analysis Formula. Here we discuss how to calculate the Horizontal Analysis along with practical examples. We also provide a Horizontal Analysis calculator with a downloadable excel template. You may also look at the following articles to learn more -

1. Cost-Benefit Analysis Formula

2. Break Even Analysis Formula

3. Vertical Analysis of Income Statement

4. Variance Analysis Formula

5. Different Types of Balance Sheet Ratios

Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year)/ Amount in Base Year]* 100

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Horizontal Analysis Formula | Calculator (Example with Excel Template)

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Horizontal Analysis Formula (Table of Contents) The term "Horizontal Analysis" refers to the financial statement analysis in historical data from the income statement, balance sheet, and cash flow statement is compared with each other.

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Horizontal analysis is used when analyzing a company's financial statements over multiple periods. It is usually depicted as percentage growth over the same line item in the base year. It allows financial statement users to easily spot trends and growth patterns and shows a company's growth and financial position versus competitors. Horizontal analysis can be manipulated to make the current period look better if specific historical periods of poor performance are chosen as a comparison.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis. Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

Horizontal Analysis FAQs

How Is Horizontal Analysis Performed?

To perform a horizontal analysis:

1. Choose a line item, account balance, or ratio that you want to analyze.

2. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.

3. Calculate thepercentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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Horizontal Analysis's are used to analyze historical trends. Taking one specific piece of financial information from one accounting period, and comparing it to a different period shows how this information has changed over time. This site broke down the information of a horizontal analysis in easy to read, informative sections. I like how they had this site laid out. They used examples for finding the horizontal analysis percentage, which I found really helpful in understanding the formula.

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What is Horizontal Analysis?

Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period with information from other periods. Analysts use such an approach to analyze historical trends.

Trends or changes are measured by comparing the current year's values against those of the base year. The goal is to determine any increase or decline in specific values. A percentage or an absolute comparison may be used in horizontal analysis.

Horizontal analysis can also be compared with vertical analysis. Whereas vertical analysis analyzes a particular financial statement using only one base financial statement of the reporting period, horizontal analysis compares a specific financial statement with other periods or the cross-sectional analysis of a company against another company.

Horizontal Analysis in Reporting Standards

As outlined in the Generally Accepted Accounting Principles (GAAP), the rules for the preparation of financial statements require financial statements to be consistent and comparable to compare and evaluate companies and their financial performance properly. Consistency constraint here means that the same accounting methods and principles must be used each year since they remain constant over the years.

On the other hand, comparability constraint dictates that a company's financial statements and other documentation be such that they can be evaluated against other similar companies within the same industry. Horizontal analysis is used to improve and enhance these constraints during financial reporting.

Therefore, analysts and investors can identify factors that drive a company's financial growth over a period of time. They are also in a position to determine growth patterns and trends, such as . The method also enables the analysis of relative changes in different product lines and projections into the future.

Key Metrics in Horizontal Analysis

A company's financial statements - such as the balance sheet, cash flow statement Cash Flow Statement​ , and income statement - can reveal operational results and give a clear picture of business performance. In the same vein, a company's emerging problems and strengths can be detected by looking at critical business performance, such as return on equity, inventory turnover, or profit margin.

For example, a company's management may establish that the robust growth of revenues or the decline of the cost of goods sold as the cause for rising earnings per share. By exploring coverage ratios, interest coverage ratio Interest Coverage Ratio , and cash flow-to-debt ratio, horizontal analysis can establish whether sufficient liquidity can service a company. Horizontal analysis can also be used to compare growth rates and profitability over a specific period across firms in the same industry.

Example of Horizontal Analysis

In horizontal analysis, the changes in specific financial statement values are expressed as a percentage and in . To calculate the percentage change, first select the base year and comparison year. Subsequently, calculate the dollar change by subtracting the value in the base year from that in the comparison year and divide by the base year. The result is then multiplied by 100.

To illustrate, consider an investor who wishes to determine Company ABC's performance over the past year before investing. Assume that ABC reported a net income of $15 million in the base year, and total earnings of $65 million were retained. The company reported a net income of $25 million and retained total earnings of $67 million in the current year.

From the example above, Company ABC increased its net income and retained earnings over the year by $10 million and $2 million, respectively. Therefore, the company's net income grew by:

[($25 million - $15 million) / $15 million] x 100 = 66%

On the other hand, the company's retained earnings grew by:

[($67 million - $65 million) / $65 million] x 100 = 3.07%

Drawbacks of Horizontal Analysis

The value of horizontal analysis enables analysts to assess the company's past performance and current financial position or growth and project the useful insights gained into the future. However, when using the analysis technique, the comparison (current) period can be made to appear uncommonly bad or good. It depends on the choice of the base year and the chosen accounting periods on which the analysis starts.

For example, an analyst may get excellent results when the current period's income is compared with that of the previous quarter. However, the same results may be below par when the base year is changed to the same quarter for the previous year.

A notable problem with the horizontal analysis is that the compilation of financial information may vary over time. It means that elements of financial statements, such as liabilities, assets, or expenses, may change between different accounting periods, leading to variation when account balances for each accounting period are sequentially compared.

As a result, some companies maneuver the growth and profitability trends reported in their financial horizontal analysis report using a combination of methods to break down business segments. Regardless, accounting changes and one-off events can be used to correct such an anomaly and enhance horizontal analysis accuracy.

Related Readings

To keep advancing your career, the additional resources below will be useful:

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period with information from other periods. Analysts use such an approach to analyze historical trends. Trends or changes are measured by comparing the current year's values against those of the base year.

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Horizontal analysis is used to spot and evaluate trends over a specific period of time. It uses a line by line comparison to compare the totals it allows you to compare revenue totals from two years to see if it increased, decreases, or remained the same.

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We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner.

Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods. Horizontal analysis can be used with an income statement or a balance sheet.

At least two accounting periods are required for a valid comparison, though in order to spot actual trends, it's better to include three or more accounting periods when calculating horizontal analysis.

How detailed your initial financial statements are depends largely on the accounting software application you're using. If you're using an entry-level application, it's likely you'll need to use spreadsheets in order to complete the horizontal analysis.

Overview: What is horizontal analysis?

Horizontal, or trend, analysis is used to spot and evaluate trends over a specific period of time.

For instance, instead of creating a balance sheet or income statement for one specific period of time, you would also create a comparative income statement or balance sheet that covers quarterly or annual activity for your business.

The comparative statement is then used to highlight any increases or decreases over that specific time frame. This enables you to easily spot growth trends as well as any red flags that may need to be addressed.

Horizontal analysis uses a line-by-line comparison to compare the totals. For example, if you run a comparative income statement for 2018 and 2019, horizontal analysis allows you to compare revenue totals for both years to see if it increased, decreased, or remained relatively stagnant.

Adding a third year to the analysis will be even more helpful, as you'll be able to see if there is a definite trend.

Horizontal analysis vs. vertical analysis: What's the difference?

Horizontal analysis looks at changes line by line between specific accounting periods, usually quarterly or yearly, whereas vertical analysis restates balance sheet or income statement amounts as a percentage of total assets (balance sheet) or net sales (income statement).

While horizontal analysis is used to compare line items over specific periods of time in order to spot trends, vertical analysis is used to restate and compare changes in percentages, and is more frequently used by investors and creditors to compare company performance with other companies in the same industry.

How to perform a horizontal analysis

Use the following steps to begin performing a horizontal analysis:

Step 1: Run a comparative income statement and balance sheet for the periods you wish to compare. You'll need a minimum of two periods to compare, but you'll be able to spot trends much better if you use at least three periods.

Step 2: Decide how you want to approach your horizontal analysis. You have several options:

Direct comparison: The direct comparison is simply comparing the results of one accounting period to another. For example, if your 2018 revenue was $20,000 and your 2019 revenue was $27,000, the difference would be $7,000. The comparison method allows you to quickly view any changes from period to period, and whether those changes are beneficial or require further research.

Variance: You can choose to calculate the variance between your chosen periods to determine whether the impact was positive or negative. The variance method is particularly helpful when the horizontal analysis is being used to determine the financial health of your business by those outside the business, such as investors and creditors.

Percentage: The percentage method is helpful if you're looking for more in-depth analysis. Using the percentage method, the first period of your income statement or balance sheet is considered your base period, with each subsequent period comparing line-by-line results to the base year. For example, in the income statement below, the difference in revenue between 2017 and 2018 is $13,000, so you would use the following horizontal analysis formula to determine the percentage by which revenue increased:

$13,000 ÷ $54,000 x 100 = 24%
That means that from 2017 to 2018, your revenue increased by 24%.

To compare 2019 revenue to 2017 revenue, you'll complete the following calculations:
$73,000 - $54,000 = $19,000 variance $19,000 ÷ $54,000 x 100 = 35% increase in revenue
You can also choose to calculate income statement ratios such as gross margin and profit margin.
Horizontal Analysis - Income Statement
Step 3: Review your results. The quickest way to spot trends is to view the changes from period to period, but for more substantial analysis, you'll want to view variances, either as dollar amounts or percentages.

If you'd rather see both variances and percentages, you can add columns in order to display changes in both. While this format takes the most time to create, it also makes it easier to spot trends and better analyze business performance. This method works best when you're comparing two years side by side.
Horizontal Analysis - Income Statement
Using the comparative income statement above, you can see that your net income changed by $1,500 from 2017; a percentage increase of 5.3%, but what really stands out on the income statement is the 266% increase in depreciation expense.

If you purchased several fixed assets during 2018, the increase is easily explained, but if you didn't, this would need to be researched.

Calculating the horizontal analysis of a balance sheet is a similar process. You can choose to run a comparative balance sheet for the periods desired, or complete a side-by-side comparison of two years.

The example from Safeway Stores shows a comparative balance sheet for 2018 and 2019 following a similar format to the income statement above.

Horizontal analysis helps you spot trends

While financial statements are essential for managing your business, an income statement or balance sheet for a single period of time will not tell the complete story. Horizontal analysis answers a lot of questions, including:

How much has my revenue increased in the last quarter/year?

Is my cost of goods sold going up or down?

What areas of my business have seen the most changes?

Is my net income increasing or decreasing?

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.

Whether you do a horizontal analysis quarterly or yearly, it's worth the time and effort to perform this calculation regularly.

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A Beginner's Guide to Horizontal Analysis

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We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner. Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods.

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https://www.fool.com/the-blueprint/horizontal-analysis/

Horizontal Analysis uses an income statement or balance sheet to track accounting over a specific period of time.
It is used to find the increases and decreases in a companies funds. You can use it to compare years (example: 2020 vs 2021) to view the company's growth.

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We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner.

Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods. Horizontal analysis can be used with an income statement or a balance sheet.

At least two accounting periods are required for a valid comparison, though in order to spot actual trends, it's better to include three or more accounting periods when calculating horizontal analysis.

How detailed your initial financial statements are depends largely on the accounting software application you're using. If you're using an entry-level application, it's likely you'll need to use spreadsheets in order to complete the horizontal analysis.

Overview: What is horizontal analysis?

Horizontal, or trend, analysis is used to spot and evaluate trends over a specific period of time.

For instance, instead of creating a balance sheet or income statement for one specific period of time, you would also create a comparative income statement or balance sheet that covers quarterly or annual activity for your business.

The comparative statement is then used to highlight any increases or decreases over that specific time frame. This enables you to easily spot growth trends as well as any red flags that may need to be addressed.

Horizontal analysis uses a line-by-line comparison to compare the totals. For example, if you run a comparative income statement for 2018 and 2019, horizontal analysis allows you to compare revenue totals for both years to see if it increased, decreased, or remained relatively stagnant.

Adding a third year to the analysis will be even more helpful, as you'll be able to see if there is a definite trend.

Horizontal analysis vs. vertical analysis: What's the difference?

Horizontal analysis looks at changes line by line between specific accounting periods, usually quarterly or yearly, whereas vertical analysis restates balance sheet or income statement amounts as a percentage of total assets (balance sheet) or net sales (income statement).

While horizontal analysis is used to compare line items over specific periods of time in order to spot trends, vertical analysis is used to restate and compare changes in percentages, and is more frequently used by investors and creditors to compare company performance with other companies in the same industry.

How to perform a horizontal analysis

Use the following steps to begin performing a horizontal analysis:

Step 1: Run a comparative income statement and balance sheet for the periods you wish to compare. You'll need a minimum of two periods to compare, but you'll be able to spot trends much better if you use at least three periods.

Step 2: Decide how you want to approach your horizontal analysis. You have several options:

Direct comparison: The direct comparison is simply comparing the results of one accounting period to another. For example, if your 2018 revenue was $20,000 and your 2019 revenue was $27,000, the difference would be $7,000. The comparison method allows you to quickly view any changes from period to period, and whether those changes are beneficial or require further research.

Variance: You can choose to calculate the variance between your chosen periods to determine whether the impact was positive or negative. The variance method is particularly helpful when the horizontal analysis is being used to determine the financial health of your business by those outside the business, such as investors and creditors.

Percentage: The percentage method is helpful if you're looking for more in-depth analysis. Using the percentage method, the first period of your income statement or balance sheet is considered your base period, with each subsequent period comparing line-by-line results to the base year. For example, in the income statement below, the difference in revenue between 2017 and 2018 is $13,000, so you would use the following horizontal analysis formula to determine the percentage by which revenue increased:

$13,000 ÷ $54,000 x 100 = 24%
That means that from 2017 to 2018, your revenue increased by 24%.

To compare 2019 revenue to 2017 revenue, you'll complete the following calculations:
$73,000 - $54,000 = $19,000 variance $19,000 ÷ $54,000 x 100 = 35% increase in revenue
You can also choose to calculate income statement ratios such as gross margin and profit margin.
Horizontal Analysis - Income Statement
Step 3: Review your results. The quickest way to spot trends is to view the changes from period to period, but for more substantial analysis, you'll want to view variances, either as dollar amounts or percentages.

If you'd rather see both variances and percentages, you can add columns in order to display changes in both. While this format takes the most time to create, it also makes it easier to spot trends and better analyze business performance. This method works best when you're comparing two years side by side.
Horizontal Analysis - Income Statement
Using the comparative income statement above, you can see that your net income changed by $1,500 from 2017; a percentage increase of 5.3%, but what really stands out on the income statement is the 266% increase in depreciation expense.

If you purchased several fixed assets during 2018, the increase is easily explained, but if you didn't, this would need to be researched.

Calculating the horizontal analysis of a balance sheet is a similar process. You can choose to run a comparative balance sheet for the periods desired, or complete a side-by-side comparison of two years.

The example from Safeway Stores shows a comparative balance sheet for 2018 and 2019 following a similar format to the income statement above.

Horizontal analysis helps you spot trends

While financial statements are essential for managing your business, an income statement or balance sheet for a single period of time will not tell the complete story. Horizontal analysis answers a lot of questions, including:

How much has my revenue increased in the last quarter/year?

Is my cost of goods sold going up or down?

What areas of my business have seen the most changes?

Is my net income increasing or decreasing?

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.

Whether you do a horizontal analysis quarterly or yearly, it's worth the time and effort to perform this calculation regularly.

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A Beginner's Guide to Horizontal Analysis

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We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner. Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods.

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Horizontal analysis is used in the review of a company's financial statements over multiple periods. It is usually depicted as percentage growth over the same line item in the base year. It also allows financial statement users to easily spot trends and growth patterns and shows a company's growth and financial position versus competitors. These analysis can be manipulated to make the current period look better if specific historical periods of poor performance are chosen as a comparison.

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What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Key Takeaways

How Horizontal Analysis Works

Horizontal analysis allows investors and analysts to see what has been driving a company's financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company's performance and whether it is operating efficiently and profitably.

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 (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

Horizontal Analysis vs. 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.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as trend analysis. Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Criticism of Horizontal Analysis

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. 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.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

Company XYZ

Horizontal Analysis FAQs

How Is Horizontal Analysis Performed?

To perform a horizontal analysis:

1. Choose a line item, account balance, or ratio that you want to analyze.

2. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.

3. Calculate thepercentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company's current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between 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. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

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Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

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https://www.educba.com/horizontal-analysis-formula/

This site broke down what Horizontal Analysis is into super simple steps so anyone could understand what it means.
The purpose of this analysis technique is to provide an overall picture of where the subject company stands in terms of financial matters.

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Horizontal Analysis Formula (Table of Contents)
What is the Horizontal Analysis Formula?

The term "Horizontal Analysis" refers to the financial statement analysis in historical data from the income statement, balance sheet, and cash flow statement is compared with each other. In other words, it indicates the change either in absolute terms or as a percentage change year over year (Y-o-Y) in each of the line items. The formula for horizontal analysis (absolute terms) can be derived by deducting the amount in the base year from the amount in the comparison year. Mathematically, it is represented as,
Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year
The formula for horizontal analysis (% change) can be derived by dividing the difference between the amount in the comparison year and the base year's amount in the base year. Mathematically, it is represented as,
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Example of Horizontal Analysis Formula (With Excel Template)

Let's take an example to understand the calculation of Horizontal Analysis in a better manner.

Example #1
Let us take the example of a company named ASD Inc., which is a manufacturer of precision components for tier I OEMs. From its latest annual report, the following income statement is available: Solution:
Horizontal Analysis is calculated using the formula given below
Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year
Similarly, Calculated for below

Horizontal Analysis is calculated using the formula given below
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Similarly, Calculated for below

In the above table, it can be seen that:

The percentage change in gross profit has been relatively higher than that of net sales due to a lower increase in the cost of goods sold.

Further, operating income and net income have also witnessed higher growth due to a lower increase in SG&A expense and income tax respectively.

Example #2

Gross Profit is Calculated as
Let us take the annual report of Apple Inc. for the year 2018 to illustrate the financial statement's preparation of horizontal analysis. In this case, we will be using the income statement and accordingly, the following information has been extracted from the annual report:
Similarly Calculated For Years 2017 and 2016.
Solution:
Operating Income is Calculated as

Similarly Calculated For Years 2017 and 2016.

Net Income is calculated as

Similarly Calculated For Years 2017 and 2016.

Horizontal Analysis is calculated using the formula given below

Similarly, Calculated for below

Similarly, Calculated for the year 2017

Similarly, Calculated for below
Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Conduct a horizontal analysis of Apple Inc.'s income statement and provide your insights on the same.

The overall growth has been relatively higher in the year 2018 compared to that of the year 2017. Nevertheless, it indicates that the company has witnessed continuous growth in the last two years.

Further, it is also noticed that the operating income moves in tandem with the revenue growth, which is a good sign.

Source Link: Apple Inc. Balance Sheet

Explanation

The formula for Horizontal Analysis can be calculated by using the following steps:

Step 1: Firstly, note the line item's amount in the base year from the financial statement.

Step 2: Next, note the amount of the line item in the comparison year.

Step 3: Now, the formula for in absolute terms can be derived by deducting the amount in the base year (step 1) from the amount in comparison year (step 2), as shown below.

Step 4: Finally, the formula for horizontal analysis in percentage can be derived by dividing the difference between the amount in the comparison year and the amount in the base year (step 3) by the amount in the base year (step 1), as shown below.

Relevance and Use of Horizontal Analysis Formula

It is important to understand the concept of horizontal analysis because of the following reasons. It helps in determining the trend in each line item Y-o-Y. Any stark deviation in trend may be an indication of some anomaly in reporting that requires immediate investigation. It can be used to assess the performance of a company over a period of time. This analysis technique can provide an overall picture of where the subject company stands in terms of financial matters.

Horizontal Analysis Formula Calculator

You can use the following Horizontal Analysis Formula Calculator

Recommended Articles

This is a guide to Horizontal Analysis Formula. Here we discuss how to calculate the Horizontal Analysis along with practical examples. We also provide a Horizontal Analysis calculator with a downloadable excel template. You may also look at the following articles to learn more -

1. Cost-Benefit Analysis Formula

2. Break Even Analysis Formula

3. Vertical Analysis of Income Statement

4. Variance Analysis Formula

5. Different Types of Balance Sheet Ratios

Horizontal Analysis (absolute) = Amount in Comparison Year - Amount in Base Year Horizontal Analysis (%) = [(Amount in Comparison Year - Amount in Base Year)/ Amount in Base Year]* 100

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Horizontal Analysis Formula | Calculator (Example with Excel Template)

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Horizontal Analysis Formula (Table of Contents) The term "Horizontal Analysis" refers to the financial statement analysis in historical data from the income statement, balance sheet, and cash flow statement is compared with each other.

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Horizontal Analysis is used to analyze financial statements from a specific accounting period. This usually uses a base year and the current year to make the comparison. You will be able to see the financial position and growth of a company.

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What is Horizontal Analysis?

Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period with information from other periods. Analysts use such an approach to analyze historical trends.

Trends or changes are measured by comparing the current year's values against those of the base year. The goal is to determine any increase or decline in specific values. A percentage or an absolute comparison may be used in horizontal analysis.

Horizontal analysis can also be compared with vertical analysis. Whereas vertical analysis analyzes a particular financial statement using only one base financial statement of the reporting period, horizontal analysis compares a specific financial statement with other periods or the cross-sectional analysis of a company against another company.

Horizontal Analysis in Reporting Standards

As outlined in the Generally Accepted Accounting Principles (GAAP), the rules for the preparation of financial statements require financial statements to be consistent and comparable to compare and evaluate companies and their financial performance properly. Consistency constraint here means that the same accounting methods and principles must be used each year since they remain constant over the years.

On the other hand, comparability constraint dictates that a company's financial statements and other documentation be such that they can be evaluated against other similar companies within the same industry. Horizontal analysis is used to improve and enhance these constraints during financial reporting.

Therefore, analysts and investors can identify factors that drive a company's financial growth over a period of time. They are also in a position to determine growth patterns and trends, such as . The method also enables the analysis of relative changes in different product lines and projections into the future.

Key Metrics in Horizontal Analysis

A company's financial statements - such as the balance sheet, cash flow statement Cash Flow Statement​ , and income statement - can reveal operational results and give a clear picture of business performance. In the same vein, a company's emerging problems and strengths can be detected by looking at critical business performance, such as return on equity, inventory turnover, or profit margin.

For example, a company's management may establish that the robust growth of revenues or the decline of the cost of goods sold as the cause for rising earnings per share. By exploring coverage ratios, interest coverage ratio Interest Coverage Ratio , and cash flow-to-debt ratio, horizontal analysis can establish whether sufficient liquidity can service a company. Horizontal analysis can also be used to compare growth rates and profitability over a specific period across firms in the same industry.

Example of Horizontal Analysis

In horizontal analysis, the changes in specific financial statement values are expressed as a percentage and in . To calculate the percentage change, first select the base year and comparison year. Subsequently, calculate the dollar change by subtracting the value in the base year from that in the comparison year and divide by the base year. The result is then multiplied by 100.

To illustrate, consider an investor who wishes to determine Company ABC's performance over the past year before investing. Assume that ABC reported a net income of $15 million in the base year, and total earnings of $65 million were retained. The company reported a net income of $25 million and retained total earnings of $67 million in the current year.

From the example above, Company ABC increased its net income and retained earnings over the year by $10 million and $2 million, respectively. Therefore, the company's net income grew by:

[($25 million - $15 million) / $15 million] x 100 = 66%

On the other hand, the company's retained earnings grew by:

[($67 million - $65 million) / $65 million] x 100 = 3.07%

Drawbacks of Horizontal Analysis

The value of horizontal analysis enables analysts to assess the company's past performance and current financial position or growth and project the useful insights gained into the future. However, when using the analysis technique, the comparison (current) period can be made to appear uncommonly bad or good. It depends on the choice of the base year and the chosen accounting periods on which the analysis starts.

For example, an analyst may get excellent results when the current period's income is compared with that of the previous quarter. However, the same results may be below par when the base year is changed to the same quarter for the previous year.

A notable problem with the horizontal analysis is that the compilation of financial information may vary over time. It means that elements of financial statements, such as liabilities, assets, or expenses, may change between different accounting periods, leading to variation when account balances for each accounting period are sequentially compared.

As a result, some companies maneuver the growth and profitability trends reported in their financial horizontal analysis report using a combination of methods to break down business segments. Regardless, accounting changes and one-off events can be used to correct such an anomaly and enhance horizontal analysis accuracy.

Related Readings

To keep advancing your career, the additional resources below will be useful:

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Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period with information from other periods. Analysts use such an approach to analyze historical trends. Trends or changes are measured by comparing the current year's values against those of the base year.

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https://www.wallstreetmojo.com/horizontal-analysis

This site really broke down in detail what Horizontal Analysis is. I learned that Horizontal Analysis is used for evaluating trends year over year or quarter over quarter. If you are an investor and thinking about investing in a company, only a year-end balance sheet or income statement wouldn’t be enough for you to judge how a company is doing.

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What is Horizontal Analysis? Horizontal analysis interprets the change in financial statements over two or more accounting periods based on the historical

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https://www.investopedia.com/terms/h/horizontalanalysis.asp

Horizontal analysis is used in financial statement analysis to compare data like line items and ratios over multiple accounting periods. These analyses show financial statement users trends and growth patterns. By viewing these trends, companies can project future performance. Also, they can be used to compare companies in the same industry and see how they are performing against each other. Horizontal analysis measures profit margins, return on equity, and inventory turnover. By measuring these, someone can easily see a company's strengths and weaknesses. The difference between horizontal and vertical analysis is that vertical shows the relationship of numbers during a certain time period. Horizontal analysis shows amounts from financial statements over years. To do this analysis, pick a base year and compare the dollar and percent change to years with the same base year. First, calculate the percent change by dividing the dollar change between the comparison year and the base year by the line item value in the base year. After that, multiply the number by 100.