Horizontal Analysis

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. The key advantage of using horizontal analysis is that it allows for the visual identification of anomalies from long-running trends.

Depending on the metrics you want to focus on, you will need different financial statements, like balance sheets, income statements, or cash-flow statements. The horizontal analysis evaluates trends Year over Year or Quarter over Quarter . If you are an investor considering investing in a company, only a year-end balance sheet or income statement would not be enough to judge how a company is doing. It would help if you looked at a couple of years to be sure. Better yet, you can see many years of balance sheets and income statements and make a comparison among them.

What Is Vertical Analysis?

Horizontal analysis compares financial information over time, typically from past quarters or years. Horizontal analysis is performed by comparing financial data from a past statement, such as the income statement. When comparing this past information one will want to look for variations such as higher or lower earnings. One reason is that analysts can choose a base year where the company’s performance was poor and base their analysis on it.

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.

Company

Those who wish to invest can use horizontal analysis to determine the performance status of a company. The technique shows whether or not the company is expanding and appreciating in terms of value. Therefore, an investor can easily track a company’s earnings per share ratio, using this analysis balance sheet before making an investment decision. If the analysis shows constant growth year after another, it means that there is a positive trend. So, any investor would most likely prefer to invest in the company and vise versa. When it comes to management, it is mostly concerned with the company’s daily operations.

• When it comes to management, it is mostly concerned with the company’s daily operations.
• This allows users to work in the comfort of Microsoft Excel with the support of a much more sophisticated data management system at their disposal.
• Ratios such as earnings per share, return on assets, and return on equity are similarly invaluable.
• So, when comparing account balances between different periods, there are likely to be variances.
• We will take 2015 as the base year and 2016 as the comparison year.
• Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments.

First, we need to take the previous year as the base year and last year as the comparison year. So, for example, let us say we are comparing 2015 and 2016. We will take 2015 as the base year and 2016 as the comparison year. As we see, we can correctly identify the trends and develop relevant areas to target for further analysis.

How to perform Horizontal Analysis?

Briefly define horizontal analysis, vertical analysis, and ratio analysis to financial… In this first example, I will be doing a horizontal analysis of Company A’s revenue based on its annual income statement. Now that you have the percentage change values for your chosen variables – both for your company and others in the same industry – it’s time to analyze your company’s values and those of your competitors.

Therefore, total net sales are the Oral, Personal & Home Care, andPet Nutrition Segment. 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. Its results are often limited to quantitative analysis only, what is a horizontal analysis and not qualitative analysis. For example, balance sheet may exhibit a healthy current ratio but will not reveal the level of obsolescence present in the inventory considered in the calculation. Ratios analysis indicates an entity’s financial health as well as its operational efficiency through various parameters (e.g., liquidity and solvency) which other analysis techniques may not address.

What Are the Benefits of Horizontal Analysis?

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