Horizontal Analysis vs Vertical Analysis of Financial Statements

In fact, there must be a bare minimum of at least data from two accounting periods for horizontal analysis to even be plausible. 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. Trends or changes are measured by comparing the current year’s values against those of the base year. 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.

In this sample comparative income statement, sales increased 20.0% from one year to the next, yet gross profit and income from operations increased quite a bit more at 33.3% and 60.0%, respectively. Changes between the income from operations and net income lines can be reviewed to identify the reasons for the relatively lower increase in net income. For example, let’s take the case of the income statement – if the gross profit in year 1 was US$40,000 and in year 2 the gross profit was US$44,000, the difference between the two is $4,000.

Key Takeaways and Conclusion

An investor can see if a business is expanding and becoming more valuable or becoming less efficient and less valuable. For example, an investor can use the horizontal analysis of the balance sheet to track the earnings per share ratio on a company which of these are the same as horizontal analysis? he is thinking about investing in. If the ratio continues to grow year over year, the investor’s analysis would show a positive trend and he would probably choose to invest in the company granted other metrics are equally as positive.

Vertical analysis requires numbers in a financial statement to be restated as percentages of a base dollar amount. For balance sheet analysis, total assets, or total liabilities and equity, are used as the base amounts. When financial statements are converted to percentages, they are called common-size financial statements.

Comparison Period to Base Period Percentage Change Example

Any opinions, analyses, reviews or recommendations expressed here are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any financial institution. Insert a column to the right of ‘2022’ and click on the cell corresponding to the first revenue line item. From 2021 to 2020, we’ll take the comparison year (2021) and subtract the corresponding amount recorded in the base year (2020). In order to express the decimal amount in percentage form, the final step is to multiply the result by 100.

• However, you can do this very quickly for multiple years, particularly if you’re interested in long-term trends.
• Given below is a horizontal analysis in excel of a comparative income statement (i.e. year 1 – base, year 2, and year 3).
• For example, you can use vertical analysis to compare multiple line items from the income statement (revenue, COGS, operating expenses, etc.) as a percentage of total revenue.
• By the time Dallas was on the clock, they had their pick of all the centers in the draft class, as well as several options at tackle.
• The amounts from the most recent years will be divided by the base year amounts.
• 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.
• To calculate the percentage change, first select the base year and comparison year.

To conduct horizontal analysis i.e. evaluate underlying trends, it’s essential to compare financial statements of a company or companies over two or more accounting periods. Carrying out horizontal analysis of the income statement and balance sheet helps investors and creditors to determine the current financial position of a company. By looking at past performance, it can help assess growth rates, spot trends (by comparing changes from period to period), generate forecasts, or project the insights gained into the future. Horizontal analysis can help evaluate a company’s financial standing or position vis-à-vis its competitors. 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.

Best practices for horizontal analysis

The VBG prepared and shared the specific files to the University Medical Center Wurzburg. Data protection and confidentiality agreements were signed prior to study research. By the time Dallas was on the clock, they had their pick of all the centers in the draft class, as well as several options at tackle. Instead of picking whoever their hearts desired, the Cowboys traded back five spots with the Lions and, ultimately, selected Tyler Guyton out of Oklahoma. This allows us to see the relative size of each component and compare them over time.