Horizontal analysis, or trend analysis, is a method where financial statements are compared to reveal financial performance over a specific period of time. Use it to spot trends in your business.Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods. Horizontal analysis can be used with an income statement or a balance sheet. 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.
The firm can make some year-end changes to its financial statement to improve its ratios. It depicts the amount of change as a percentage to show the difference over time as well as the dollar amount. However, for the management and inventors to be able to make better-informed decisions an additional vertical analysis technique is necessary. However, the percentage increase in sales was greater than the percentage increase in the cost of sales. Horizontal analysis of income statements also produces worthwhile information.
The analyst compares the same items or ratios for a particular company over a period of time in order to assess the company’s growth during that time. Horizontal analysis can also be performed on multiple companies in the same industry, to assess a company’s performance relative to its competitors.
I don't know how to do a horizontal analysis…
— Chuck (@CharlesLikeDamn) February 18, 2015
The most obvious benefit of horizontal analysis is that helps paint a picture of how a business has performed over time. Trends are used horizontal analysis when projecting future performance and analysts use them to identify where they believe the business is within the business cycle.
How Horizontal Analysis Works
We need to perform a horizontal analysis of the income statement of this company. A common size income statement is an income statement in which each line item is expressed as a percentage of the value of sales, to make analysis easier. Vertical analysis is a method of financial statement analysis in which each line item is listed as a percentage of a base figure within the statement. For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales.
In the next section, you have step-by-step instructions on how to do horizontal analysis with examples using a balance sheet and an income statement. First, decide which periods you will be comparing, carefully choosing comparable periods. For example, if your industry is seasonal, comparing consecutive quarters would provide misleading results. It would make more sense to compare the values for a specific quarter to the same quarter from past years. If you happen to choose a particularly bad time period for your base values, the values for your comparison period may look much better than they are.
Disadvantages 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. Regardless of how useful trend analysis may be, it is regularly criticized.
- Once a year in our small business we have the HR person and the president give us a presentation showing us that very thing.
- As with the horizontal analysis, you need to use more years for any meaningful trend analysis.
- Drag down the cell with the formula to copy it to the other current assets line items.
- Cost Of SalesThe costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.
- 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.
- For example, a business may compare cash to total assets in the current year.
Finally, this technique involves preparation of Comparative Balance Sheet and Comparative Income Statement so as to highlight the changes in the various assets, liabilities, income and expenditure. In the Comparative Balance Sheet, the figures of assets and liabilities are set out as at the beginning and at the June of the year along with the extent of increases or decreases between the two dates.