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.
Full Answer
How do you perform a horizontal analysis of financial statements?
To perform a horizontal analysis: Choose a line item, account balance, or ratio that you want to analyze. Pick a base year, and compare the dollar and percent change to subsequent years with the base year.
What is a common problem with horizontal analysis?
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.
What is the difference between horizontal and trend analysis?
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.
What is the formula for Horizontal analysis?
Horizontal Analysis formula = [(Amount in comparison year – Amount in the base year)/ Amount in a base year] x 100
What does the horizontal analysis tell you?
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.
What is a horizontal common size analysis?
In horizontal analysis, a financial manager gathers the base amount from an earlier time period, such as from three years earlier. They can then divide the current year's line item by the base amount to determine the percentage of the base.
How do you read a horizontal analysis?
Horizontal Analysis (%) = [(Amount in Comparison Year – Amount in Base Year) / Amount in Base Year] * 100The overall growth has been relatively higher in the year 2018 compared to that of the year 2017. ... Further, it is also noticed that the operating income moves in tandem with the revenue growth, which is a good sign.
How do you interpret a horizontal and vertical analysis?
Given these descriptions, the main difference between vertical analysis and horizontal analysis is that vertical analysis is focused on the relationships between the numbers in a single reporting period, while horizontal analysis spans multiple reporting periods.
Which of the following best describes horizontal analysis?
Which of the following statements BEST describes horizontal analysis? A side-by-side comparison of two or more years financial statement.
What is common size analysis horizontal and vertical analysis?
Vertical analysis, which is also known as common-size analysis, is similar to horizontal analysis and can be performed on the same financial documents. However, financial analysts perform vertical analysis vertically inside of a column rather than horizontally across time periods.
What is horizontal analysis quizlet?
What is horizontal analysis? also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time.
When would a horizontal analysis of a balance sheet be helpful?
You use horizontal analysis to find and monitor trends over a period of time. Instead of creating an income statement or balance sheet for one period, you would also create a comparative balance sheet or income statement to cover quarterly or annual business activities.
How do you prepare a horizontal analysis of a balance sheet?
0:267:56Horizontal Analysis of the Balance Sheet - YouTubeYouTubeStart of suggested clipEnd of suggested clipSo let's let's look at our numbers here and see what we got. So the first thing you want to do whenMoreSo let's let's look at our numbers here and see what we got. So the first thing you want to do when you're doing a horizontal analysis is you want to take the difference between the two years.
What is the purpose of horizontal and vertical analysis?
The primary aim of horizontal analysis is to compare line items in order to ascertain the changes in trend over time. As against, the aim of vertical analysis is to ascertain the proportion of item, in relation to a common item in percentage terms.
How is horizontal analysis of financial statements accomplished?
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.
What does a vertical analysis tell you?
Vertical analysis is an accounting tool that enables proportional analysis of documents, such as financial statements. While performing a vertical analysis, every line item on a financial statement is entered as a percentage of another item.
Why do investors 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 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, ...
Why is horizontal analysis important?
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.
What is the difference between vertical and horizontal 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.
What is the purpose of an analysis of the income statement, balance sheet, and cash flow statement over time?
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.
What is the purpose of GAAP?
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' ...
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.
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 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.
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.
Uses in Financial Modeling
Horizontal Analysis is very useful for Financial Modeling and Forecasting Financial Modeling And Forecasting Financial modeling refers to the use of excel-based models to reflect a company's projected financial performance.
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
