Company Financial Statement Analysis & Interpretation of Financial Statements

how to do horizontal analysis

This is clearly a move into short-term holdings and away from long-term holdings that reflects the expectation that high inflation will continue to plague the economy. Now we can assume a sales growth percentage based on the historical trends and project the revenues under each segment. Therefore, total net sales are the Oral, Personal & Home Care, andPet Nutrition Segment. Financial Modeling And ForecastingFinancial modeling refers to the use of excel-based models to reflect a company’s projected financial performance. Form the table above we can understand that there was no change in the share capital but the reserve and surplus was increased by 44%. Other liabilities increased by 38%, liquidity increased by 18%, investment, net fixed asset and other assets by 18%, 56% and 15% respectively.

how to do horizontal analysis

The key to analysis is to identify potential problems provide the necessary data to legitimize change. No company lives in a bubble, so it is also helpful to compare these results with those of competitors to determine whether the problem is industry-wide, or just within the company itself. If no problems exist industry-wide, one will observe a shortfall in Sales and rise in the dollar amount of Sales returns. Besides analyzing the past performance, analysis helps determine the strategy of a company moving forward. However, for the management and inventors to be able to make better-informed decisions an additional vertical analysis technique is necessary. For example, if a company starts generating low profits in a particular year, expenses can be analyzed for that year.

What is the Horizontal Analysis Formula?

This method of analysis makes it easy for the financial statement user to spot patterns and trends over the years. Though there’s value in this approach, the current period may appear uncommonly good or bad, depending on the choice of the base year and the chosen accounting period the analysis begins with. Given how 2020 was so widely different from years past, it’s hopefully an outlier for many industries as the global economy begins to recover from the pandemic. There was a huge increase in cash-on-hand and a very meaningful increase in receivables, making total assets increase by nearly 50%.

A Beginner’s Guide to Horizontal Analysis — The Motley Fool

A Beginner’s Guide to Horizontal Analysis.

Posted: Wed, 18 May 2022 07:00:00 GMT [source]

The comparability constraint dictates that your statements and documents need to be evaluated against companies similar to yours within the same industry. Horizontal analysis improves and enhances the constraints during financial reporting. By comparing historical financial information you can easily determine your growth and position compared to your competitors. Since we horizontal analysis do not have any further information about the segments, we will project the future sales of Colgate based on this available data. We will use the sales growth approach across segments to derive the forecasts. As a financial statement, balance sheet is concerned with summarizing assert owned by the firm and sources of borrowing and owned funds in acquiring these assets.


The example from Safeway Stores shows a comparative balance sheet for 2018 and 2019 following a similar format to the income statement above. The comparative statement is then used to highlight any increases or decreases over that specific time frame. This enables you to easily spot growth trends as well as any red flags that may need to be addressed. Conduct a horizontal analysis of Apple Inc.’s income statement and provide your insights on the same. Likewise, a large change in dollar amount might result in only a small percentage change which will not cause concern for the business owner. By identifying a problem, businesses can then devise a strategy to cope with it.

how to do horizontal analysis

This figure compares the difference in accounts from 2014 to 2015, showing each account as a percentage of sales for each year listed. Horizontal analysis of the income statement is usually in a two-year format, such as the one shown below, with a variance also shown that states the difference between the two years for each line item.

Horizontal and vertical analysis: step-by-step instructions on how to do it and why it is used

Although there is increase in liabilities and provision, investments in made in fixed assets and other assets have increased showing a good balance in the company statement. Vertical analysis refers to the method of financial analysis where each line item is listed as a percentage of a base figure within the statement.

Horizontal analysis is the comparison of historical financial information over a series of reporting periods, or of the ratios derived from this financial information. The intent is to see if any numbers are unusually high or low in comparison to the information for bracketing periods, which may then trigger a detailed investigation of the reason for the difference. For the balance sheet, the items of the sheet are divided by total assets. Calculate the percentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100. That’s because while the revenue may increase, the gross profit margin may not. I’ve actually invested in stocks that reported better than average revenue, and the moment the quarterly report came out, the stock took a nosedive.

With this approach, you can also analyze relative changes between lines of products to make more accurate predictions for the future. To calculate the percentage change, first select the base year and comparison year.

how to do horizontal analysis

For instance, a large increase in Sales returns and allowances coupled with a decrease in Sales over two years would be cause for concern. If this is the case, you need to address and solve the problem or the company’s reputation and future may be at stake. In this class, we will concentrate on liquidity, solvency, and profitability and you will learn the others in your managerial accounting class. In addition, for the hospitality industry, Smith Travel Research , CBRE, and HVS all provide various statistics, from operational to financial, for management and owners. If you work in the hotel segment of the hospitality industry and especially if you are in the front office, you might have heard of the the STAR report from STR. Operating and administrative expenses also increased slightly and interest expense increased by over 12%.

If analysis reveals any unexpected differences in income statement accounts, management and accounting staff at the company should isolate the reasons and take action to fix the problem. Those who wish to invest can use horizontal analysis to determine the performance status of a company. The technique shows whether or not the company is expanding and appreciating in terms of value. Therefore, an investor can easily track a company’s earnings per share ratio, using this analysis balance sheet before making an investment decision. If the analysis shows constant growth year after another, it means that there is a positive trend. So, any investor would most likely prefer to invest in the company and vise versa.

  • For example, in Safeway Stores’ balance sheets, both sales and the cost of sales increased from 2018 to 2019.
  • Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company’s financial statements over time.
  • The analysis of the different items in income statement is also done following the similar procedure.
  • In the above balance sheet, the assets are arrange in order of their convertibility into cash and liabilities and equity are arranged in order of their maturity.
  • It analyses the trend of the company by calculating the change percentage between the same line item for various years.
  • 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.

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