Horizontal Analysis Overview, Key Metrics, Example

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On the other hand, vertical analysis offers a snapshot, a deep dive into the structural composition of financial statements at a particular moment. To assess how the amounts have changed over time, compare the identical line items from successive statements and represent the changes as percentages or dollar amounts. Horizontal analysis is the evaluation of an organization’s financial performance over many reporting periods. Side by side they do this to determine if the company’s performance is improving or declining. For example, if Mistborn Trading set total assets as the base amount and wanted to see what percentage of total assets were made up of cash in the current year, the following calculation would occur. The horizontal analysis provides critical insights that can inform decisions around financial management, budgeting, and strategy.

Calculate Percentage Change

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In this second example, I will do a horizontal analysis of Company B’s current assets based on the annual balance sheets. The two examples below show how to do horizontal analysis using Google Sheets, but you can easily do the same in Excel. The first example is based on a balance sheet, and the second is on an income statement. 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. Here, for the sake of illustration, we have shown the absolute change (in US$) and percentage change (%) of all line items in the income statement between year 1 and year 2 only. We can now see how much any item, such as net income, increased or decreased from year 1 (base year) to year 3 in absolute and percentage terms.

Horizontal analysis vs vertical 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. Vertical analysis shows a comparison of a line item within a statement to another line item within that same statement. For example, a business may compare cash to total assets in the current year. This allows a business to see what percentage of cash (the comparison line item) makes up total assets (the other line item) during the period.

• Trends or changes are measured by comparing the current year’s values against those of the base year.
• Meanwhile, the current WNBA CBA states that players would only be paid 50 percent of shared revenue if “Cumulative League Revenue” exceeds the “Cumulative Revenue Target” — which hasn’t happened yet.
• With different bits of calculated information now embedded into the financial statements, it’s time to analyze the results.
• In particular, the specific metrics and any notable patterns or trends that were identified can be compared across different companies — ideally to close competitors operating in the same industry — in order to evaluate each finding in more detail.

Background To identify mechanisms and patterns of anterior cruciate ligament (ACL) injury in adult women’s professional football by means of video match analysis. Integrating both techniques allows deeper analysis of trends alongside present-day account composition. In summary, the horizontal format emphasizes the accounting equation, while the vertical format allows easier analysis of sub-accounts over time.

Horizontal and vertical analysis

For example, earnings per share (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. You can also choose to calculate income statement ratios such as gross margin and profit margin. For example, if management determines that increased earnings per share are due to an increase in revenue or a drop in the cost of goods sold (COGS), the horizontal analysis can corroborate. It’s best to do so for all of the financial statements at once so you can understand the full influence of operational outcomes on a company’s financial situation across the review period. This indicates that while profitability improved in absolute terms, there may be an issue with expense control since they grew faster than revenue. The company should investigate why expenses increased at a higher rate and take steps to streamline operations.