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This type of analysis reveals trends in line items such as cost of goods sold. We’re expressing all of these individual line items as a percentage of that base amount so that we can
understand the relationship between these specific line items and that base amount. We can look at changes within the company, which is an internal evaluation.
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. Vertical analysis, horizontal analysis and financial ratios are part of financial statement analysis.
Definition of Vertical Analysis
Note, we are focusing on the individual
line items and the changes within those line items themselves. To perform vertical analysis (common-size analysis), we take each line item and calculate it as a percentage of revenue so that we can come up with “common size” results for both companies. 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.
Horizontal and vertical analysis are two main types of analysis methods used for this purpose. 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 https://www.bookstime.com/ 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. To illustrate horizontal analysis, let’s assume that a base year is five years earlier.
Summary- Horizontal vs Vertical Analysis
A percentage or an absolute comparison may be used in horizontal analysis. Now we can convert that increase or decrease amount to a percentage, to show us the percentage increase
or decrease of these individual financial statement lines, to better understand how they are changing over
time. We’re going to express all of these line items–sales returns and allowances, sales discounts, operating
expenses, etc.–as a percentage of our base amount, which again, for the income statement, is our net sales.
By using horizontal analysis, we can now clearly see that Google’s revenue, gross profit, and EBITDA grew faster than Apple’s in every year except for 2015 (and one EBITA exception in 2018), with 2016 looking particularly rough for Apple. Whether you do a horizontal analysis quarterly or yearly, it’s worth the time and https://www.bookstime.com/articles/vertical-and-horizontal-analysis effort to perform this calculation regularly. The example from Safeway Stores shows a comparative balance sheet for 2018 and 2019 following a similar format to the income statement above. It provides a good opportunity to compare your company’s “return on sales” with the performance of other companies in your industry.