Horizontal Analysis

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.

How Horizontal Analysis Works

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.

Example of Horizontal Analysis

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

Differences Between Horizontal Analysis & Vertical Analysis

Horizontal Analysis

  • 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.

Vertical Analysis

  • 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.

Conclusion

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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