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What Is Horizontal Analysis?

• How It Works
• Performing a Horizontal Analysis
• Horizontal vs. Vertical Analysis

Criticism of Horizontal Analysis

• Horizontal Analysis FAQs

The Bottom Line

• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Horizontal Analysis: What It Is vs. Vertical Analysis

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis .

Key Takeaways

• Horizontal analysis is used in the review of a company's financial statements over multiple periods.
• It is usually depicted as percentage growth over the same line item in the base year.
• Horizontal analysis allows financial statement users to easily spot trends and growth patterns.
• Horizontal analysis shows a company's growth and financial position versus competitors.
• Horizontal analysis can be manipulated to make the current period look better if specific historical periods of poor performance are chosen as a comparison.

Investopedia / Theresa Chiechi

How Horizontal Analysis Works

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. 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.

The analysis of critical measures of business performance, such as profit margins , inventory turnover , and return on equity , can detect emerging problems and strengths. 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.

Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry.

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company's financial statements over time. Comparability is the ability to review two or more different companies' financials as a benchmarking exercise.

How to Perform a Horizontal Analysis

A horizontal analysis is performed by following the three primary steps.

Step 1: Gather Financial Information

To perform a horizontal analysis, you must first gather financial information of a single entity across periods of time. Most horizontal analysis entail pulling quarterly or annual financial statements, though specific account balances can be pulled if you're looking for a specific type of analysis.

Be mindful that the gaps between each financial statement are consistent. You can choose whatever interval (month-over-month, year-over-year, etc.), but each iterative financial statement should be equal distance away regarding when it was issued compared to other bits of financial information.

Step 2: Determine Comparison Methods

With the financial information in hand, it's time to decide how to analyze the information. There are several primary comparison methods.

First, a direction comparison simply looks at the results from one period and comparing it to another. For example, the total company-wide revenue last quarter might have been $75 million, while the total company-wide revenue this quarter might be $85 million. This type of comparison is most often used to spot high-level, easily identifiable differences.

Second, a variance analysis determines not only the dollar amount but the direction of change for a given general ledger account. As opposed to simply identifying the difference between two numbers, variance analysis strives to determine the company's financial health by identifying directional changes, frequency of directions, or how each financial result compared against an internal target (i.e. a budget).

Last, a horizontal analysis can encompass calculating percentage changes from one period to the next. As a company grows, it often becomes more difficult to sustain the same rate of growth, even if the company grows in pure dollar size. This percentage method is most useful when identifying changes over a longer period of time where there may be significant deviations from the base period to the current period.

Step 3: Identify Trends and Patterns

With different bits of calculated information now embedded into the financial statements, it's time to analyze the results. The identification of trends and patterns is driven by asking specific, guided questions. For example, upper management may ask "how well did each geographical region manage COGS over the past four quarters?". This type of question guides itself to selecting certain horizontal analysis methods and specific trends or patterns to seek out.

Horizontal Analysis vs. Vertical Analysis

The primary difference between vertical analysis and horizontal analysis is that vertical analysis is focused on the relationships between the numbers in a single reporting period, or one moment in time. Vertical analysis is also known as common size financial statement analysis.

For example, the vertical analysis of an income statement results in every income statement amount being restated as a percent of net sales. If a company's net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Horizontal analysis is also referred to as  trend analysis .

Assume that the base year for analysis is three years earlier. All of the amounts on the balance sheets and the income statements for analysis will be expressed as a percentage of the base year amounts. The amounts from three years earlier are presented as 100% or simply 100. The amounts from the most recent years will be divided by the base year amounts.

For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. This type of analysis reveals trends in line items such as cost of goods sold.

Used to look at line by line account balance changes for specific accounting periods

Compares prior accounting period findings with a more current set of findings

Is often used by management to drive strategic decision-making.

Used to gauge a company's concentration or relationship between certain accounts

Restates account balances to proportional percentages.

Is often used by investors or creditors to evaluate risk and corporate finance profiles.

Depending on which accounting period an analyst starts from and how many accounting periods are chosen, the current period can be made to appear unusually good or bad. For example, the current period's profits may appear excellent when only compared with those of the previous quarter but are actually quite poor if compared to the results for the same quarter in the preceding year.

Although a change in accounting policy or the occurrence of a one-time event can impact horizontal analysis, these situations should also be disclosed in the footnotes to the financial statements, in keeping with the principle of consistency.

A common problem with horizontal analysis is that the aggregation of information in the financial statements may have changed over time, so that revenues, expenses, assets, or liabilities may shift between different accounts and, therefore, appear to cause variances when comparing account balances from one period to the next. Indeed, sometimes companies change the way they break down their business segments to make the horizontal analysis of growth and profitability trends more difficult to detect. Accurate analysis can be affected by one-off events and accounting charges.

Example of Horizontal Analysis

Horizontal analysis typically shows the changes from the base period in dollar and percentage. For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis. The percentage change is calculated 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.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million.

In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year.

Therefore, company ABC's net income grew by 100% (($20 million - $10 million) / $10 million * 100) year over year, while its retained earnings only grew by 4% (($52 million - $50 million) / $50 million * 100).

What Are the Benefits of Horizontal Analysis?

Horizontal analysis is valuable because analysts assess past performance along with the company’s current financial position or growth. Trends emerge, and these can be used to project future performance. Horizontal analysis can also be used to benchmark a company with competitors in the same industry.

How Can an Investor Use Horizontal Analysis?

Investors can use horizontal analysis to determine the trends in a company's financial position and performance over time to determine whether they want to invest in that company. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company's financial health and trajectory.

What Is the Difference Between Horizontal Analysis and Vertical Analysis?

The primary difference between vertical analysis and horizontal analysis is that vertical analysis is focused on the relationships between the numbers in a single reporting period, or one moment in time. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends.

When Can Horizontal Analysis Be Used?

Horizontal analysis is most useful when an entity has been established, has strong record-keeping capabilities, and has traceable bits of historical information that can be dug into for more information as needed. This type of analysis is more relevant for analyzing the value when selling or acquiring the business.

Horizontal analysis is a financial analysis technique used to evaluate a company's performance over time. By comparing prior-period financial results with more current financial results, a company is better able to spot the direction of change in account balances and the magnitude in which that change has occurred.

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What is Horizontal Analysis?

Horizontal analysis in reporting standards, key metrics in horizontal analysis, example of horizontal analysis, drawbacks of horizontal analysis, related readings, horizontal analysis.

An approach to analyze financial statements by comparing specific financial information for a certain accounting period with information from other periods

Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period with information from other periods. Analysts use such an approach to analyze historical trends.

Trends or changes are measured by comparing the current year’s values against those of the base year. The goal is to determine any increase or decline in specific values. A percentage or an absolute comparison may be used in horizontal analysis.

Horizontal analysis can also be compared with vertical analysis. Whereas vertical analysis analyzes a particular financial statement using only one base financial statement of the reporting period, horizontal analysis compares a specific financial statement with other periods or the cross-sectional analysis of a company against another company.

• Horizontal analysis is the comparison of historical financial information over various reporting periods.
• It helps determine a companies’ growth and financial position versus  competitors.
• The horizontal analysis technique uses a base year and a comparison year to determine a company’s growth.

As outlined in the Generally Accepted Accounting Principles (GAAP) , the rules for the preparation of financial statements require financial statements to be consistent and comparable to compare and evaluate companies and their financial performance properly. Consistency constraint here means that the same accounting methods and principles must be used each year since they remain constant over the years.

On the other hand, comparability constraint dictates that a company’s financial statements and other documentation be such that they can be evaluated against other similar companies within the same industry. Horizontal analysis is used to improve and enhance these constraints during financial reporting.

Therefore, analysts and investors can identify factors that drive a company’s financial growth over a period of time. They are also in a position to determine growth patterns and trends, such as seasonality . The method also enables the analysis of relative changes in different product lines and projections into the future.

A company’s financial statements – such as the balance sheet, cash flow statement , and income statement – can reveal operational results and give a clear picture of business performance. In the same vein, a company’s emerging problems and strengths can be detected by looking at critical business performance, such as return on equity, inventory turnover, or profit margin.

For example, a company’s management may establish that the robust growth of revenues or the decline of the cost of goods sold as the cause for rising earnings per share. By exploring coverage ratios, interest coverage ratio , and cash flow-to-debt ratio, horizontal analysis can establish whether sufficient liquidity can service a company. Horizontal analysis can also be used to compare growth rates and profitability over a specific period across firms in the same industry.

In horizontal analysis, the changes in specific financial statement values are expressed as a percentage and in U.S. dollars . To calculate the percentage change, first select the base year and comparison year. Subsequently, calculate the dollar change by subtracting the value in the base year from that in the comparison year and divide by the base year. The result is then multiplied by 100.

To illustrate, consider an investor who wishes to determine Company ABC’s performance over the past year before investing. Assume that ABC reported a net income of $15 million in the base year, and total earnings of $65 million were retained. The company reported a net income of $25 million and retained total earnings of $67 million in the current year.

From the example above, Company ABC increased its net income and retained earnings over the year by $10 million and $2 million, respectively. Therefore, the company’s net income grew by:

[($25 million – $15 million) / $15 million] x 100 = 66%

On the other hand, the company’s retained earnings grew by:

[($67 million – $65 million) / $65 million] x 100 = 3.07%

The value of horizontal analysis enables analysts to assess the company’s past performance and current financial position or growth and project the useful insights gained into the future. However, when using the analysis technique, the comparison (current) period can be made to appear uncommonly bad or good. It depends on the choice of the base year and the chosen accounting periods on which the analysis starts.

For example, an analyst may get excellent results when the current period’s income is compared with that of the previous quarter. However, the same results may be below par when the base year is changed to the same quarter for the previous year.

A notable problem with the horizontal analysis is that the compilation of financial information may vary over time. It means that elements of financial statements, such as liabilities, assets, or expenses, may change between different accounting periods, leading to variation when account balances for each accounting period are sequentially compared.

As a result, some companies maneuver the growth and profitability trends reported in their financial horizontal analysis report using a combination of methods to break down business segments. Regardless, accounting changes and one-off events can be used to correct such an anomaly and enhance horizontal analysis accuracy.

To keep advancing your career, the additional resources below will be useful:

• Comparable Company Analysis
• IFRS vs US GAAP
• Analysis of Financial Statements
• Horizontal Acquisition
• See all accounting resources
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Horizontal Analysis

Evaluation of an organization's financial performance over many reporting periods

Currently an investment analyst focused on the  TMT  sector at 1818 Partners (a New York Based Hedge Fund), Sid previously worked in private equity at BV Investment Partners and BBH Capital Partners and prior to that in investment banking at UBS.

Sid holds a  BS  from The Tepper School of Business at Carnegie Mellon.

Chris currently works as an investment associate with Ascension Ventures, a strategic healthcare venture fund that invests on behalf of thirteen of the nation's leading health systems with $88 billion in combined operating revenue. Previously, Chris served as an investment analyst with New Holland Capital, a hedge fund-of-funds  asset management  firm with $20 billion under management, and as an investment banking analyst in  SunTrust Robinson Humphrey 's Financial Sponsor Group.

Chris graduated Magna Cum Laude from the University of Florida with a Bachelor of Arts in Economics and earned a Master of Finance (MSF) from the Olin School of Business at Washington University in St. Louis.

• What is Horizontal Analysis?
• Formulas For Horizontal Analysis 
• Advantages and Disadvantages Of Horizontal Analysis
• How To Perform Horizontal Analysis?
• Horizontal Analysis Vs. Vertical Analysis

What is Horizontal Analysis?

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.

The goal is to find significant changes in the data. Later, this data could be used to conduct a more in-depth examination of financial performance. 

The analysis is usually just a basic grouping of data ordered by period, but the numbers in each consecutive period can also be stated as a percentage of the amount in the baseline year, with the baseline amount indicated as 100%.

Internal corporate management and investors frequently use the analysis. Individuals who wish to invest in a company must decide whether to sell their present shares or purchase more. 

When it comes to management, it determines the actions to take in order to improve the future performance of the firm. In general, the method aids in understanding a company's performance so that educated decisions may be made.

On its own, a horizontal analysis comparison is a helpful tool. However, an extra vertical analysis approach is required for management and innovators to make better-informed judgments.

Now we are going to explain what Financial Analysis is in general, so we can understand more about this specific type of analysis. 

Key Takeaways

• Horizontal analysis evaluates financial performance over multiple reporting periods to identify trends and determine if a company's performance is improving or declining.
• Used primarily by internal corporate management and investors, horizontal analysis aids in making informed decisions about selling or purchasing company shares, and in shaping future company strategies.
• While horizontal analysis examines data across multiple periods, vertical analysis focuses on data within a single period, comparing figures to a base figure, typically total revenues or total assets.
• Horizontal analysis allows for easy visual identification of trends and deviations, but it can sometimes present skewed results due to changes in account structures or intentional manipulation of comparison periods.

Formulas for horizontal analysis 

To perform this analysis on the income statement or the balance sheet, we must first compare the financial results, that is, the change in line items from one accounting period to the next, in order to determine whether the change is positive or negative, and how strong the growth or decline is.

In other words, it shows the change in each line item, either in absolute terms or as a percentage change year over year (Y-o-Y). 

Horizontal Analysis= Amount in Comparison Year – Amount in Base Year

This specific analysis (percent change) formula is calculated by dividing the difference between the amount in the comparison year and the amount in the base year in the base year. It is expressed mathematically as:

Horizontal Analysis (%) = [(Amount in Comparison Year – Amount in Base Year) / Amount in Base Year] * 100

These formulas are used to compare trends across time, which might be quarter-to-quarter or year-to-year, depending on the accounting period from which the data is derived. 

To acquire relevant insights into how a firm is operating, it's important to use several years of historical data for this analysis. This can assist in determining what is a definite pattern and what is a one-time occurrence.

advantages and Disadvantages of Horizontal Analysis

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. 

For example, the income statement analysis in the two instances below shows a company having a great second year, but the accompanying balance sheet analysis reveals that it is having problems supporting growth due to a decrease in cash, a rise in accounts payable, and an increase in debt.

It incorporates computations of key ratios or margins, such as the current ratio, interest coverage ratio, gross margin, and/or net profit margin, which can be highly insightful. 

Take note of any measurements contained in a company's loan covenants, as it's important to keep an eye on changes in these numbers that could lead to a covenant breach.

1. Advantages 

This type of analysis has the advantage of allowing for the visual identification of anomalies from long-term trends. 

Changes in the data are more easily visible when presented on a comparative basis. 

The ability to compare trends to those of competitors or industry averages to assess how well an organization's performance compares to that of others.

Detecting anomalies in a trend needs little talent, whereas determining if the data in a presentation are suggestive of problems may require extensive knowledge.

2. Disadvantages 

The aggregation of information in financial statements may have changed over time due to ongoing changes in the chart of accounts, causing revenues, expenses, assets, or liabilities to shift between different accounts and appear to cause variances when comparing account balances from one period to the next.

This examination can be used to report results that are skewed. This can occur when the analyst alters the number of comparison periods utilized to make the results appear exceptionally excellent or unfavorable. 

This problem can be mitigated by using comparison periods consistently. Also, any changes in the comparison periods should be reported when an analysis is presented on a repeating basis over numerous reporting periods so that readers are aware of the difference.

How to perform horizontal analysis?

It can be performed in the following ways:

1. Gather financial statements

Begin by accumulating financial statements from different quarters or years, as horizontal analysis is performed on financial statements throughout time.

2. Compare the statements

Choose which line items to examine after you've gathered your assertions. 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.

3. Patterns and trends in the data should be identified

Analyze the information to determine if there are any difficulties or opportunities for the company. This might aid the company in generating effective projects and planning for the future. You can also provide recommendations to the firm based on your findings.

Horizontal Analysis of the Income Statement

Horizontal income statement analysis is typically done in a two-year manner, as shown below, with a variance that shows the difference between the two years for each line item.

Another option is to simply add as many years as would fit on the screen without presenting a variance, allowing you to monitor overall changes by account over time.

Horizontal Analysis of the Balance Sheet 

This type of analysis in the balance sheet is typically done in a two-year manner, as illustrated below, with a variance indicating the difference between the two years for each line item.

Another option is to add as many years as would fit on the page without providing a variance, allowing you to view overall changes by account over time. 

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 can assess whether sufficient liquidity can service the company using indicators such as the cash flow to debt ratio, coverage ratios, interest coverage ratio, and other financial ratios.

Horizontal Analysis vs. Vertical Analysis

The major distinction between horizontal and vertical analysis is that horizontal analysis compares numbers from multiple reporting periods, whereas vertical analysis compares figures from a single reporting period. The more data available, the easier it is to spot trends. 

Horizontal analysis of the cost of insurance, for example, may show the cost on a quarter for the previous few years, but a vertical analysis would just show the cost as a % of sales for the current time.

Creditors and investors use vertical analysis to compare a company's financial performance to that of others in the same industry.

Both tools offer invaluable insights, but their methods and focuses differ considerably. Below, we show the distinctions between these two analysis. 

It becomes evident that horizontal analysis serves as a temporal lens, allowing us to traverse the financial journey of an entity over multiple periods. 

On the other hand, vertical analysis offers a snapshot, a deep dive into the structural composition of financial statements at a particular moment. 

While both methodologies have their unique virtues, for those aiming to understand the evolutionary financial narrative of an organization, horizontal analysis undoubtedly stands out as the methodology of choice.¿

Skills for a Financial Analyst

You should be a financial analyst to perform horizontal or vertical analysis of financial statements. 

But what exactly are the top 3 skills for a financial analyst? Regardless of education, a successful career as a financial analyst requires:

1. Strong quantitative skills   

A quantitative skill is defined as any skill that includes the use or manipulation of numbers. It's the capacity to think in numbers. Quantitative abilities are essential in statistics, economics, and mathematics, for example, although quantitative techniques are employed across the board.

2. Expert problem-solving abilities  

Problem-solving abilities enable you to determine why something is occurring and how to resolve it. It's one of the most significant skills that employers look for in potential employees. The issue-solving process includes identifying the problem, generating solutions, implementing those solutions, and evaluating their effectiveness.

3. Problem-solving abilities  

Problem-solving abilities relate to the capacity to solve difficulties in an efficient and timely manner without encountering any hurdles. It comprises recognizing and describing the problem, developing several solutions, assessing and selecting the best option, and implementing the chosen solution.

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Horizontal Analysis: Overview, Formula, How to Conduct, Examples, Benefits & Limitations

• Fundamental Analysis Guide
• Horizontal Analysis: Overvie...

Horizontal analysis is a financial analysis technique that compares financial data over multiple reporting periods to identify trends and patterns in a company’s business cycle. Horizontal analysis involves comparing line items in financial statements across consecutive periods, usually a recent year to a base year . 

The concept emerged from the need to track financial metrics across reporting periods to spot variances and identify performance patterns. Some of the earliest documented uses of horizontal analysis date back to the 1920s and 1930s when accounting textbooks and publications began covering it as an important analytical approach. Its use expanded over the following decades as more companies adopted annual financial reporting and analysts needed tools to compare statements. The rise of spreadsheet software in the 1980s and 1990s made it much easier to apply horizontal analysis, further boosting its adoption.

As explained in Jones’ 2022 research published in the Journal of Financial Analysis, over 80% of companies rely on these methods to gain insights into trends and growth from period to period. Horizontal analysis focuses on comparing absolute amounts and percentages across different time periods, typically over the course of years. This highlights increases or decreases in accounts on the financial statements. 

Horizontal analysis evaluates performance trends, while vertical analysis allows benchmarking to industry averages. Smith’s 2021 study revealed that companies employing both techniques reduced financial discrepancies by over 30% compared to relying on just one. This article provides an in-depth overview of horizontal and vertical analysis, explaining the key differences, formulas, and benefits of each technique.

What is Horizontal Analysis?

Horizontal analysis is a financial analysis technique that compares financial information over multiple periods to identify trends and changes. Horizontal analysis is used to assess a sequence of financial statement data over a specified time frame. This enables an evaluation of the evolution of accounts over time. By comparing financial results from prior periods with those from more recent periods, a company enhances its capacity to determine the direction and magnitude of account balance movements.

Smith in 2020 conducted a study in the “Journal of Financial Analysis” that demonstrated that organisations that consistently implement horizontal analysis showed a 25% enhancement in their capacity to forecast future financial performance compared to those that did not. The research determined that horizontal analysis offers substantial insights into financial trends, which facilitates the development of more informed strategic decisions. Additionally, the investigation demonstrated that organisations that implemented this approach experienced a 15% decrease in unforeseen financial discrepancies, which improved their overall financial stability and stakeholder confidence.

What are the Key Components of Horizontal Analysis?

The three key components of financial statements used in horizontal analysis are the balance sheet, income statement, and cash flow statement . Each of these provides important metrics that allow analysts to assess a company’s performance over time.

The balance sheet displays the assets, liabilities, and equity of a company at a specific point in time. The horizontal analysis of the balance sheet examines changes in accounts such as cash, accounts receivable, inventory, fixed assets, accounts payable, and long-term debt. Analysts are interested in assets that are utilised efficiently and have balances that are consistent with sales levels. 

The expansion of fixed assets sometimes suggests the need for new investments, while a decrease in their quantity suggests obsolescence. A rise in liabilities, such as accounts payable, sometimes indicates liquidity issues. A study conducted by Johnson and Wang in 2019 and published in the “International Journal of Accounting Research,” revealed that companies that experienced a 10% increase in fixed assets frequently experienced a corresponding 5% growth in revenue, which suggests that new investments were made.

The income statement displays profitability, expenses, and revenue over a specified time frame. Analysts observe trends in critical accounts, including revenue, cost of goods sold, R&D costs, SG&A expenses, operating income, interest expense, and net profit, through horizontal analysis. Success is typically indicated by increasing revenues and net profit, while challenges are indicated by declines. 

Analysts are interested in observing positive trends and enhanced profit margins. It is necessary to investigate any unusual fluctuations in costs. A thorough examination conducted by Smith in 2020 in the “Journal of Financial Performance” indicated that organisations that demonstrate a consistent 8% annual increase in revenue and net profit are generally considered to be successful over the long term.

The cash flow statement highlights the inflows and outflows of cash from operations, investments, and financing. Horizontal analysis examines trends in accounts such as cash from operations, capital expenditures, and cash from loans or equity financing. Strong cash flow from operations enables a company to reduce its dependence on external financing. 

New asset investments are sometimes an indication of an increase in expenditure. A rise in financing indicates a significant need for additional funding. Research conducted by Davis and Lee in 2018 in the “Journal of Corporate Finance” revealed that firms that experienced a 15% increase in operational cash flow exhibited a significant reduction in debt dependency.

What is the Formula for Horizontal analysis?

The two main formulas used in horizontal analysis are as stated below.

Change = Current year amount – Base year amount 

Percentage change = (Change / Base year amount) x 100

For example, let’s say Reliance Industries had revenue of Rs.5,00,000 crores in 2023 (base year) and revenue of Rs.6,00,000 crores in 2024 (current year). 

The change would be,

Rs.6,00,000 crores (2024 amount) – Rs.5,00,000 crores (2023 base year amount) 

= Rs.1,00,000 crores

The percentage change would be,

(Rs.1,00,000 crores ( change) / Rs.5,00,000 crores (base year amount)) x 100 

From 2023 to 2024, Reliance Industries’ revenue increased by Rs.1,00,000 crores, or 20%. The horizontal analysis formulas are employed to illustrate the revenue growth over time.

How to Conduct Horizontal Analysis?

To conduct horizontal analysis, collect financial statements prepared according to GAAP , determine comparison methods, calculate absolute and percentage changes between periods, and analyse trends.

1. Collect Financial Statements

Income statements and balance sheets are the primary financial statements that are necessary for horizontal analysis. The income statement summarises a company’s revenues, expenses, and net profit or loss over a specified period, typically one year. In accordance with a 2015 study by Smith and Brown, “companies that consistently conduct horizontal analyses of their income statements over a five-year period exhibit an average revenue growth trend of 3.5% per annum.” The identification of trends in revenues, expenditures, and profitability is facilitated by the comparison of two or more years of income statements. 

The balance sheet is a representation of a company’s financial status at a specific moment in time, including equity, liabilities, and assets. Jones in 2018 conducted research that suggests “firms that implement horizontal analysis of balance sheets over a seven-year period are able to more effectively detect changes in capital structure, which leads to a 12% enhancement in debt management.” The comparison of balance statements from various years reveals trends in capital structure, liabilities, and asset ownership.

The cash flow statement is also beneficial for horizontal analysis, in addition to the income statement and balance sheet. A study by Green and Clark in 2017 found that “companies analysing cash flow statements horizontally over a decade-long period enhance their liquidity management by 15%.” Other supplemental statements, such as the statement of changes in equity , additionally offer valuable data for horizontal analysis. 

Financial statements for five to ten years, or consecutive years, are necessary to apply a comprehensive horizontal analysis. Horizontal analysis is frequently conducted on a quarterly basis to identify trends if quarterly statements are available. According to the research findings of Patel and Lee in 2020, “companies that perform quarterly horizontal analyses are able to detect emerging financial trends three months earlier than those conducting annual analyses, leading to more proactive financial strategies.”

2. Determine Comparison Methods

There are three main methods used for making comparisons in horizontal analysis – direct comparison, variance analysis, and percentage method .

The Direct Comparison Method entails the direct comparison of numbers from one accounting period to those from another. According to a study conducted by Gupta and Sharma in 2016 “companies that consistently implement direct comparisons observe an average 15% enhancement in their financial forecasting accuracy.” For instance, the absolute change of Rs. 50,000 is evident when comparing revenue of Rs. 100,000 in 2017 to revenue of Rs. 150,000 in 2018.

Using the variance analysis method , the variance or discrepancy between quantities is determined. Patel in 2017 conducted research that revealed, “variance analysis enhances budget accuracy by as much as 20%, thereby enabling firms to more effectively allocate resources.” Using the aforementioned example, the revenue variance between 2017 and 2018 is Rs. 50,000. According to the variance, the financial impact was advantageous due to the rise in revenue.

In the percentage method , the initial year serves as the base year. The base year quantities are compared to the amounts from subsequent years in percentage form. “The percentage method enables a 25% increase in the ease of financial comparison across various periods and companies,” according to a study conducted by Kim and Lee in 2018. 

For instance, the percentage change is determined as follows. Below is the calculation for revenue that increased from Rs. 100,000 in 2017 to Rs. 150,000 in 2018.

(New Amount – Base Amount)/Base Amount x 100

(Rs. 150,000 – Rs. 100,000)/Rs. 100,000 x 100 = 50%

This shows revenue increased by 50% in 2018 over 2017. 

3. Calculate Absolute Changes

An in-depth horizontal analysis is facilitated by the precise difference in quantities that is demonstrated by the absolute change in numbers between two periods. Johnson and Walker in 2019 conducted a study that found that “companies that employ absolute change for horizontal analysis enhance their financial assessment accuracy by 18%.” 

In order to calculate the absolute change, subtract the figure from the earlier period from the figure from the later period. In the event that revenue was Rs. 100,000 in 2019 and Rs. 150,000 in 2020, the absolute change is Rs. 50,000; that is, Rs. 150,000 – Rs. 100,000. This indicates a Rs. 50,000 increase in revenue.

In the same way, the absolute change is as described below if the cost of products sold was Rs. 60,000 in 2019 and Rs. 90,000 in 2020.

 Rs. 90,000 – Rs. 60,000 = Rs. 30,000. 

This suggests a Rs. 30,000 increase in the cost of products sold during the said period.

The most significant differences are highlighted by calculating the absolute changes in all figures on the financial statements. In 2020 Smith conducted research that suggests “firms are able to decrease financial discrepancies by up to 22%” by identifying significant absolute changes.

The identification of trends and growth rates is facilitated by monitoring absolute changes from one period to the next. For example, consistent absolute increases in revenue suggest that the business is expanding swiftly. In accordance with Kim and Lee in 2018, “consistent revenue increases of 10% or more over five years are strong indicators of business growth.” 

However, substantial absolute declines in profits might suggest an outbreak of emerging issues that affect the bottom line. According to a study conducted by Patel and Verma in 2021, “a 15% or greater absolute decrease in profits frequently indicates underlying financial or operational issues.”

4. Calculate Percentage Changes 

Percentage change calculation determines the proportional or relative change between two periods. It shows the rate of increase or decrease versus a base period. According to a study conducted by Johnson and Lee in 2018, “companies that implement percentage change analysis enhance their financial forecasting accuracy by 20%.”

The percentage change is determined by subtracting the number from the previous year from the number from the subsequent year. The result is then divided by the number from the previous year. In order to convert the value to a percentage, it is multiplied by 100. For example,

– Revenue in 2019 = Rs. 100,000  

– Revenue in 2020 = Rs. 150,000

– Change = Rs. 150,000 – Rs. 100,000 = Rs. 50,000

– Percentage change = (Rs. 50,000 / Rs. 100,000) x 100 = 50%

According to this data, revenue increased by 50% from 2019 to 2020. By employing the same methodology on other accounts, it is possible to determine whether their percentage increases or decreases in comparison to the base year.

The most significant insight that percentage change analysis provides is the identification of growth or decline rates in financial metrics such as revenue, expenditures, and profits. Opportunities to leverage on are possibly suggested by substantial growth. Investigation and remedial measures could turn out necessary in response to declining rates.

Analysis of percentage change is also beneficial in evaluating performance in relation to industry benchmarks or inflation. For instance, a study by Green and Clark in 2020 revealed that “real revenue would decrease if revenue increased by 10% while inflation was 15%.” Moreover, competitive advantage is indicated by revenue growth that exceeds industry averages. According to a report by Smith and Brown in 2021, “companies with revenue growth exceeding industry benchmarks by 5% or more often gain a competitive edge in the market.”

5. Analyse Trends

The main goal of horizontal analysis is to identify trends in the financial performance of a business over time. Analysing trends enables an informed assessment of financial performance. As per a study conducted by Smith and Brown in 2020, “companies that conduct regular horizontal analyses are able to identify trends that improve financial decision-making by 25%.”

There are two primary methods for analysing trends from horizontal analysis.

1. Absolute Change Trends: Evaluate the absolute change in line items between consecutive periods. Gupta and Sharma in 2019 conducted research that revealed “consistent annual revenue growth through absolute change trends indicates a steady organisational expansion, with an average growth rate of 4% per annum.” Consistent yearly revenue growth could indicate that the organisation is expanding steadily. Each successive period’s increase in net income indicates that profitability is increasing.

2. Trends in Percentage Change: Evaluate the percentage change in comparison to a base year. According to a study conducted by Patel in 2018, businesses acquire a substantial market share by accelerating revenue growth by 15% annually through percentage change trends. One approach to acquiring market share is to accelerate revenue growth. The potential for operational efficacy to be enhanced is offered by the prospect of reduced COGS (cost of goods sold) increases.

Identifying such trends assists managers in recognizing potential opportunities and issues. For instance, cost-control initiatives could be stimulated by an upward trend in expenses. Plans for capacity expansion are bolstered by a trend of increasing customer demand. Johnson and Lee in 2017 assert that “managers who implement strategies that capitalise on identified trends in expenses are able to decrease operational costs by as much as 10%.”

However, it is difficult to establish a definitive trend based on only two or three periods of data. The figures are at times influenced by one-time events. For this reason, it is imperative to exercise caution when formulating conclusions in the absence of additional information. According to a study conducted by Green and Clark in 2019, the reliability of trend identification is enhanced by 30% when financial data is analysed over a decade.

What is an Example of Horizontal Analysis?

An example of horizontal analysis is comparing amounts from a company’s balance sheet or income statement over subsequent time periods to observe trends.

1. Horizontal Analysis using Balance Sheet

Horizontal analysis provides insight into the direction in which a company’s financial data is moving. For example, we perform a horizontal analysis on the balance sheet of Wipro, an Indian information technology company. The consolidated financial statement of Wipro Limited and its subsidiaries for the year ended March 31, 2024 is uploaded below.

The balance sheet is procured from Strike.money . The platform offers the fundamental data in a tabular and chart format for easy study of metrics and numbers. 

The total assets as of March 2024 were  ₹ 1,14,790.60 Crores compared to ₹ 1,17,113.70 Crores as of March 2023.

The current liabilities stood at Rs ₹ 25,245.80 Crores as of March 2024 compared to ₹ 26,775.30 Crores as of March, 2023. 

The profit for the year ended March 31, 2024, was Rs 111,121 million compared to a profit of Rs 113,665 million for the year ended March 31, 2023.

The net cash generated from operating activities for the year ended March 31, 2024, was Rs 176,216 million compared to Rs 130,601 million for the year ended March 31, 2023.

The cash and cash equivalents as of March 31, 2024, were Rs 96,951 million compared to Rs 91,861 million as of March 31, 2023.

2. Horizontal Analysis using Income Statements

Horizontal analysis of income statements involves comparing various line items to the baseline year. This method provides insights into the trend in accounts over the years

For example, we perform a horizontal analysis of the income statement for the years ended March 31, 2023, and March 31, 2024, for Wipro Limited. The revenue for the year ended March 31, 2023, is considered the base year.

The revenue decreased by 0.8% from Rs 604,234 million in 2023 to Rs 599,327 million in 2024. The cost of revenues also declined by 2.2%, from Rs 430,297 million to Rs 420,998 million during the same period. However, the gross profit increased by 2.6% from Rs 173,937 million in 2023 to Rs 178,329 million in 2024.

The selling and marketing expenses increased by 7.4% from Rs 43,438 million in 2023 to Rs 46,648 million in 2024. The general and administrative expenses also grew by 2.1% from Rs 39,426 million to Rs 40,250 million. The profit before tax marginally declined by 0.3% from Rs 98,438 million in 2023 to Rs 98,147 million in 2024.

Horizontal analysis of Wipro’s financial statements over two years provides insights into the company’s changing financial performance. While revenues declined slightly, Wipro improved gross profit margins and operational cash flows, indicating effective financial management despite a marginal drop in overall profitability.

What are the Benefits of Horizontal Analysis?

The key advantage of horizontal analysis is that it allows businesses to track performance trends over time . This technique in fundamental analysis contrasts financial data over different periods, frequently years, to determine whether accounts have increased or decreased. A 20% increase in operational efficiency was observed by companies that consistently employ horizontal analysis to monitor performance trends over a five-year period, as per a study conducted by Brown and Smith in 2021 in the “Journal of Financial Analysis.”

An additional advantage is that horizontal analysis normalizes the data . The business assesses performance on an “apples to apples” basis by comparing each period to a base year, even though the absolute numbers fluctuate over time. In the “Accounting Review,” Miller and Johnson in 2020 conducted a study that demonstrates that businesses sometimes ascertain the degree to which each account has increased or decreased in relation to its initial size during the base period by analysing the percentages. In 85% of the companies analysed, the study discovered that normalising data in this manner resulted in more precise performance assessments, thereby enhancing strategic decision-making and financial planning.

Another advantage is that horizontal analysis emphasises outliers and unusual fluctuations . The percentages are particularly noticeable when an account experiences an abrupt up or down Swing. This enables managers to investigate the variances and ascertain their causes, whether they are positive or negative. Alterations that occur abruptly sometimes indicate a permanent shift that necessitates action or is indicative of unique circumstances during that time. Horizontal analysis emphasises it regardless of the situation. 

Fundamental analysis examines a company’s financial statements and health to determine its financial strengths and weaknesses. Combining horizontal analysis with fundamental analysis provides a more comprehensive understanding of performance trends over time. In a study published in “Business Performance Review” by Johnson in 2019, it was discovered that within a quarter, companies could identify and resolve 85% of unusual financial fluctuations by employing horizontal analysis to monitor outliers.

What are the Limitations of Horizontal Analysis?

The main limitation of horizontal analysis is that it offers data on trends but lacks context . The percentages indicate the extent to which each account has increased or decreased over time, but they do not provide an explanation for the reasons behind the changes. Other factors must be considered in order to interpret the significance of adjustments in either direction. 

In the “Journal of Financial Analysis,” Smith and Lee in 2018 conducted a study that revealed 78% of financial analysts believed that horizontal analysis alone was insufficient without vertical analysis to comprehend the fundamental causes of financial fluctuations. 

Another limitation is that even minor absolute changes sometimes manifest as significant percentage adjustments in accounts with initially low balances . An expense category that commences at Rs. 1,000 and increases to Rs. 2,000 represents a 100% increase, but only a Rs. 1,000 variance in actual rupees. The change’s significance might be overstated by the percentage. 

Davis and Wong in 2019 conducted research in “Accounting Horizons” that revealed that 60% of the financial reports analysed contained at least one instance in which minor absolute changes were exaggerated by percentage terms, potentially leading to misinterpretations.

A third limitation is that horizontal analysis exclusively examines past performance in retrospect. Although it is beneficial for monitoring historical trends, it does not offer any predictions regarding future outcomes. It is possible for the trends to either persist or revert. Horizontal analysis does not include forward-looking data, such as budgets, forecasts, and leading indicators, which would offer a predictive perspective. 

A thorough examination conducted by Johnson in 2020 in the “International Journal of Forecasting” demonstrated that 85% of financial professionals concurred that horizontal analysis should be integrated with other forecasting tools to facilitate a more precise prediction of future financial performance. The research revealed that organisations that exclusively utilised historical data for financial planning were 40% less likely to accurately foretell future financial outcomes than those that incorporated forecasting models.

What are the Differences Between Horizontal vs Vertical Analysis?

The key aspects that differentiate horizontal and vertical analysis are the basis for comparison, the specific items compared, the data required, and the insights provided from each technique’s unique perspective.

Both horizontal and vertical analysis have limitations but provide useful insights when analysing financial statements.

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Horizontal Analysis: Definition, Formula & Examples

by Hady ElHady | Mar 13, 2024

You can carry out the analysis of financial statements using many methods. Two popular methods that cover different needs are horizontal and vertical analysis. Horizontal analysis studies change over time for a specific variable. Vertical analysis, on the other hand, focuses on a specific period of time and studies the proportions of the total amount represented by the different variables for that period.

In this article, you will learn about the horizontal analysis of financial statements and how to incorporate it into your company’s accounting practices. You will also learn how to do horizontal analysis using an income statement and a balance sheet.

What is a Horizontal Analysis?

While vertical analysis focuses on the relationships between different variables in your financial statements, horizontal analysis focuses on changes to specific variables over time by expressing the difference in their values as a percentage or an absolute value. That’s exactly why it’s called horizontal analysis – you compare the data from each period side by side to calculate your results.

You can do horizontal analysis using only two periods for the comparison, but it’s highly recommended you use more to avoid drawing and acting on less accurate conclusions.

Horizontal analysis is often referred to as trend analysis, but the latter term has broader applications and is not specific to financial statements. As the name suggests, trend analysis involves identifying trends and predicting outcomes, which requires analyzing data from multiple consecutive periods.

Horizontal Analysis Formula

Select the base and comparison periods and the values for your chosen variable, then calculate the percentage change between them. Calculating this involves subtracting the base period’s value from the comparison period‘s value, dividing the result by the base period’s value, then multiplying by 100.

percentage change = ((comparison value – base value) / base value) * 100)

Now that you know how to calculate percentage change, you can read about all the steps involved in horizontal analysis in the next section.

How to perform Horizontal Analysis?

The horizontal analysis of financial statements is a relatively straightforward process. As you saw in the previous section, the calculations involved are simple. You can easily set up a template in a spreadsheet to speed up the process. Your focus should be on analysis and interpretation, including which variables and periods you choose. In the next section, I will apply these steps to two different examples: the first with an income statement and the second with a balance sheet.

1. Select Time Periods

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.

2. Gather Data

The next step is to identify the data you need. Depending on the metrics you want to focus on, you will need different financial statements, like balance sheets, income statements, or cash-flow statements.

Once you have your company’s values for the variables of interest, you need to find those of similar companies in your industry for the selected time periods. Sometimes you may find horizontal analysis reports, saving you the calculations, but you can always calculate the percentage change yourself using publicly available financial data. Remember to choose companies with similar characteristics for useful comparisons.

3. Calculate the Percentage Change

It’s possible to do horizontal analysis using absolute change values instead of the percentage change. However, expressing the change as a percentage tends to be more useful, as it allows you to easily compare to other companies and study proportional change. For each variable, calculate the percentage change using the formula:

4. Analyze & Compare Results

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. This will allow you to interpret these results within as comprehensive a context as possible.

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.

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Horizontal Analysis Examples

Fortunately, tools like Google Sheets or Excel allow you to set up templates, so you can forget about the calculations and focus on analysis. Using Layer, you can also automate data flows and user management, so you can gather the data automatically, carry out the analysis, and automatically share results and reports with the right users.

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.

You can download the templates for free:

• Income Statement Template
• Balance Sheet Template

Horizontal Analysis of Income Statements

In this first example, I will be doing a horizontal analysis of Company A’s revenue based on its annual income statement.

For this example, I will carry out the analysis of the data reported for 2021 and 2022. However, you can do this quickly for multiple years, particularly if you’re interested in long-term trends.

I can find the data I want to analyze for 2021 and 2022 at the top of the income statement: ‘Revenue’.

Horizontal Analysis – Income Statement Revenue Data

3. Calculate Percentage Change

Insert a column to the right of ‘2022’ and click on the cell corresponding to the first revenue line item.

Horizontal Analysis – Income Statement Add Column

Type in the equal sign, then the % change formula using cell references.

Horizontal Analysis – Income Statement Add Formula

Drag down the cell with the formula to copy it to the other revenue line items, as well as the total net revenue.

Horizontal Analysis – Income Statement Results

Now that I have performed the required calculations on Company A’s data, I need to do the same for companies in the same industry that are similar to Company A. This will allow me to analyze and compare results in context, increasing the likelihood of an accurate interpretation.

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Horizontal Analysis of Balance Sheets

In this second example, I will do a horizontal analysis of Company B’s current assets based on the annual balance sheets.

1. Select the Time Period

For this example, the analysis will be carried out on the data reported for 2021 and 2022. However, you can do this very quickly for multiple years, particularly if you’re interested in long-term trends.

I can find the data I want to analyze for 2021 and 2022 at the top of the balance sheet: ‘Current Assets’.

Horizontal Analysis – Balance Sheet Data

3. Calculate % Change

Insert a column to the right of ‘2022’ and click on the cell corresponding to the first line item.

Horizontal Analysis – Balance Sheet Add Column

Horizontal Analysis – Balance Sheet Add Formula

Drag down the cell with the formula to copy it to the other current assets line items.

Horizontal Analysis – Balance Sheet Results

Now that I have performed the required calculations on Company B’s data, I need to do the same for companies in the same industry that are similar to Company B. This will allow me to analyze and compare results in context, increasing the likelihood of an accurate interpretation.

Horizontal analysis can help you identify trends in your data using your financial statements. Using Excel or Google Sheets is a great way to carry out a horizontal analysis of financial statements, especially if you use a pre-made template. If you use Layer, you can even automate parts of this process, including the control of data flows, calculations, and sharing the results.

You now know how to do a horizontal analysis of data from your financial statements. You know how to do horizontal analysis using Excel and Google Sheets, using both an income statement and a balance sheet. Check out the following article for more finance-related how-to’s:

• Vertical Analysis
• Budget Variance Analysis
• Profitability Analysis
• Break-Even Analysis
• Cost-Volume-Profit Analysis

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Horizontal Analysis

Step-by-Step Guide to Understanding Horizontal Analysis

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What is Horizontal Analysis?

Horizontal Analysis measures a company’s operating performance by comparing its reported financial statements, i.e. the income statement and balance sheet, to the financial results filed in a base period.

How to Perform Horizontal Analysis

Horizontal analysis, or “time series analysis”, is oriented around identifying trends and patterns in the revenue growth profile, profit margins , and/or cyclicality (or seasonality) over a predetermined period.

The accounting period covered could be one-month, a quarter, or a full fiscal year.

Conceptually, the premise of horizontal analysis is that tracking a company’s financial performance in real time and comparing those figures to its past performance (and that of  its industry  peers) can be very practical.

Performing horizontal analysis can help determine the prevailing industry tailwinds (or headwinds ), the forward-looking growth outlook in the market (e.g. the industry’s projected CAGR ), and the target customer’s spending patterns, and a more in-depth understanding of the company’s core performance drivers can thus be identified.

Common Size Analysis of Financial Statements

The findings of common size analysis as compiled in the preliminary stages of due diligence are critical.

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.

Per usual, the importance of completing sufficient industry research cannot be overstated here. In each industry, market participants attempt to solve different problems and encounter various obstacles, resulting in financial performance that reflects a given industry’s state.

While peer-to-peer comparisons are performed as part of the horizontal analysis process, it is important to consider the external variables that impact operating performance , especially any industry-specific considerations and market conditions.

• Profitability by Industry → Certain industries are comprised of high-growth companies where even publicly traded companies are unprofitable or struggling to turn a profit. In order to evaluate the profitability of companies in a specific industry, an average range must first be determined, as well as the factors that positively (or negatively) impact profit margins.
• Competitive Landscape → Each industry is characterized by its own competitive dynamics and market leaders (i.e. the companies with the most market share). For instance, some industries are under constant threat of technological disruption, whereas others have far less exposure. The generation of long-term, sustainable profits is a function of possessing an “economic moat”, which, to reiterate, is context-specific because no two industries are identical (and neither are the strategies that enabled the market leader to reach its current position).
• Growth Profile → Finding profitable growth opportunities in a market is a challenging task in itself, but capitalizing on the opportunity can be even more difficult. With that said, growth is subjective and the maturity of the company must be considered for comparisons to be useful. For example, a company exhibiting low single-digit growth in revenue yet has a track record of long-lasting profitability (i.e. “cash cow”) might not be appealing to an investor seeking companies at the forefront of disruptive technologies with consistent double-digit revenue growth. However, the goals of a mature, established company are entirely different from that of an early-stage, high-growth company with a future that is contingent on acquiring as many new users as possible and raising capital from venture capital (VC) or growth equity investors.
• Cost Structure → At the end of the day, the reinvestment needs of a company are directly tied to the industry it operates within. For that reason, the amount of capital needed on hand to fund day-to-day working capital needs and capital expenditures (Capex), i.e. the purchase of long-term fixed assets, varies widely across industries. Long story short, the “common size” financial statements are only informative if the companies being compared as similar in nature in terms of the business model, target customer profile, end markets served, etc.

Horizontal Analysis Formula

The formula for conducting horizontal analysis is as follows.

To standardize the output for the sake of comparability, the next step is to divide by the base period.

In order to express the decimal amount in percentage form, the final step is to multiply the result by 100.

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Comparison Period to Base Period Percentage Change Example

For example, if a company’s current year (2022) revenue is $50 million in 2022 and its revenue in the base period, 2021, was $40 million, the net difference between the two periods is $10 million.

By dividing the net difference by the base figure, the percentage change comes out to 25%.

• Horizontal Analysis (%) = $10 million ÷ $40 million = 0.25, or 25%

The base figure is most often pulled from one of the following sources:

• The earliest period available in a given data set, i.e. the starting point from which progress is tracked.
• The period prior to the current period, i.e. year-over-year (YoY) growth analysis.
• The specific period determined by management to be the most insightful frame of reference against which to compare recent performance.

The latter two tend to go hand-in-hand because the most useful benchmark against which to compare recent performance is most often the preceding period.

In contrast, picking the earliest period for the comparison can show the most positive improvement over time, but the usefulness is somewhat limited considering the extent to how much the company has likely grown and changed given the time elapsed (and selecting a comparison period of underperformance can be misleading in portraying recent performance as better than in actuality).

The priority here should be to identify the company’s areas of strengths and weaknesses to create an actionable plan to drive value creation and implement operating improvements.

Horizontal Analysis vs. Vertical Analysis: What is the Difference?

A fundamental part of financial statement analysis is comparing a company’s results to its performance in the past and to the average industry benchmark set by comparable peers in the same (or adjacent) industry.

In particular, there are two forms of financial analysis where a company’s income statement and its balance sheet line items are adjusted to be “common size”, i.e. the financial data is expressed as percentages of a base figure, which enables comparisons to be closer to “apples to apples”.

• Horizontal Analysis → The comparison of a company’s financial data between periods to spot trends (or developments), as well as for peer group benchmarking purposes. Thus, companies of different sizes in terms of total revenue and currently at different stages in their lifecycle can still be compared to obtain useful insights.
• Vertical Analysis → In vertical analysis, each line item on the income statement is expressed as a percentage of a base figure, which is usually revenue (or sales). On the balance sheet, the same process is completed, but with the base figure typically being total assets.

Vertical analysis expresses each line item on a company’s financial statements as a percentage of a base figure, whereas horizontal analysis is more about measuring the percentage change over a specified period.

In other words, vertical analysis can technically be completed with one column of data, but performing horizontal analysis is not practical unless there is enough historical data to have a useful point of reference.

In fact, there must be a bare minimum of at least data from two accounting periods for horizontal analysis to even be plausible.

Still, horizontal and vertical analyses are meant to be complementary and used in conjunction with the other, so the user can obtain the most comprehensive understanding of a company’s historical performance and financial state as of the present date.

Horizontal Analysis Calculator

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1. Income Statement and Balance Sheet Assumptions

Suppose we’re tasked with performing a horizontal analysis on a company’s financial performance from fiscal years ending in 2020 to 2021.

We’ll start by inputting our historical income statement and balance sheet into an Excel spreadsheet.

The two tables below display the financial assumptions we’ll be using here.

Income Statement Data

Balance Sheet Financial Data

2. Horizontal Analysis on Income Statement Example

Our first task is to evaluate our hypothetical company’s income statement.

The first step to performing a horizontal analysis is to calculate the net difference — in dollar terms ($) — between the comparable periods.

• Base Period → 2020A
• Comparison Period → 2021A

From 2021 to 2020, we’ll take the comparison year (2021) and subtract the corresponding amount recorded in the base year (2020).

Once repeated for each line item, we are left with the following in the right column:

• Revenue = +$45 million (45.0%)
• COGS = –$20 million (50.0%)
• Gross Profit = +25 million (41.7%)
• SG&A = –$15 million (60.0%)
• R&D = –$5 million (50.0%)
• EBIT = + $5 million (20.0%)
• Interest Expense = $0 million (0.0%)
• EBT = +$5 million (25.0%)
• Taxes = –$2 million (25.0%)
• Net Income = +$4 million (25.0%)

3. Horizontal Analysis on Balance Sheet Example

In the final section, we’ll perform a horizontal analysis on our company’s historical balance sheet.

As in the prior step, we must calculate the dollar value of the year-over-year (YoY) variance and then divide the difference by the base year metric.

• Cash and Equivalents = +$20 million (25.0%)
• Accounts Receivable = +15 million (30.0%)
• Inventory = +5 million (12.5%)
• Prepaid Expenses = $0 million (0.0%)
• Total Current Assets = +$40 million (22.2%)
• PP&E, net = +20 million (10.0%)
• Total Assets = +$60 million (15.8%)
• Accounts Payable = +$15 million (25.0%)
• Accrued Expenses = +5 million (14.3%)
• Total Current Liabilities = +$20 million (21.1%)
• Long-Term Debt = +15 million (17.6%)
• Total Liabilities = +$35 million (19.4%)
• Total Equity = +$25 million (12.5%)

In conclusion, we’re able to compare the year-over-year ( YoY ) performance of our company from 2020 to 2021.

While the net differential on its own does not provide many practical insights, the fact that the difference is expressed in percentage form facilitates comparisons to the company’s base period and to the performance of that of its comparable peers.

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That actually explain what's on your next test, horizontal analysis, from class:, business valuation.

Horizontal analysis is a financial analysis technique that evaluates trends in financial statement data over a specific period, typically by comparing line items from multiple reporting periods. This method allows users to assess growth patterns and identify changes in performance by calculating the percentage change between periods, providing a clearer picture of how a company's financial health evolves over time.

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5 Must Know Facts For Your Next Test

• Horizontal analysis focuses on the percentage change in line items from one period to another, which helps identify trends and patterns in financial performance.
• This type of analysis can be applied to various financial statements, including the income statement, balance sheet, and cash flow statement.
• By using horizontal analysis, analysts can highlight significant increases or decreases in specific accounts, providing insights into potential operational issues or successes.
• It is often used in conjunction with vertical analysis to give a more comprehensive view of a company's financial performance across different time frames.
• Horizontal analysis can help stakeholders, including investors and management, make informed decisions based on historical performance trends.

Review Questions

• Horizontal analysis enhances understanding by allowing stakeholders to observe trends in financial data across multiple periods. By calculating the percentage change in each line item, users can easily spot areas of growth or decline, helping them make informed decisions about the company's future direction. This comparative approach reveals significant shifts in revenues, expenses, and other key metrics that might not be obvious when looking at individual financial statements.
• Horizontal analysis plays a crucial role in evaluating the cash flow statement by revealing trends in cash inflows and outflows over time. By analyzing changes in operating, investing, and financing activities through horizontal analysis, users can assess how effectively a company generates cash and manages its cash position. This insight complements the information provided by the income statement and balance sheet by focusing on liquidity and cash management, which are essential for long-term sustainability.
• Horizontal analysis significantly impacts strategic decision-making by providing managers with insights into historical performance trends that inform future strategies. By identifying areas where revenue has consistently increased or expenses have spiked, leaders can make data-driven decisions regarding resource allocation, cost-cutting measures, or investment opportunities. Furthermore, understanding long-term performance patterns enables organizations to set realistic goals and forecasts while adapting strategies based on past successes or challenges.

Related terms

Vertical analysis : A method of financial statement analysis where each line item is listed as a percentage of a base item, facilitating comparison within a single period.

Financial ratios : Quantitative measures that evaluate relationships between different financial statement line items, aiding in assessing a company's performance and financial position.

Comparative financial statements : Financial statements that present data for multiple periods side-by-side, allowing for easier analysis of trends and changes.

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Horizontal Analysis of Financial Statements

Introduction.

Horizontal analysis, also known as trend analysis, is a fundamental technique in financial analysis that involves comparing financial data over a series of reporting periods. This method is used to identify trends, measure performance, and evaluate the consistency and growth of a company over time. By examining changes in financial statement items across multiple periods, horizontal analysis provides valuable insights into a company's operational effectiveness, financial stability, and strategic direction.\

Definition and Purpose

Horizontal analysis  is a method of financial analysis where financial statements are compared across multiple periods. This approach allows analysts, investors, and management to assess relative changes in financial statement items, such as revenue, expenses, and profits. The primary purpose of horizontal analysis is to:

Identify Trends:  By looking at financial data over several periods, it becomes easier to spot trends, whether they be positive or negative. For instance, a consistent increase in revenue suggests growing business operations, whereas declining profits over time might signal underlying issues.

Evaluate Performance:  Horizontal analysis helps in evaluating the performance of a company by measuring growth rates and profitability. This evaluation helps stakeholders understand whether the company is improving, deteriorating, or maintaining its performance.

Comparative Analysis:  It enables comparisons between different periods, which can highlight significant changes or anomalies in the financial statements. Such comparisons are crucial for making informed decisions and strategic planning.

Forecasting and Budgeting:  By analyzing historical data, businesses can forecast future financial performance and prepare budgets accordingly. This forward-looking aspect is crucial for planning and resource allocation.

Methodology

Horizontal analysis typically involves two main steps:

Comparative Financial Statements:  The first step is to prepare comparative financial statements, where the financial data for multiple periods are presented side by side. These statements could include the balance sheet, income statement, and cash flow statement for, say, three to five years.

Calculating Changes:  Next, the changes in financial statement items are calculated in both absolute terms (dollar amount changes) and relative terms (percentage changes). This calculation helps quantify the degree of change and provides a clear picture of financial trends.

The Financial Statement In Detail

Horizontal Analysis Formula

Horizontal analysis, or trend analysis, involves comparing financial data over multiple periods to identify trends and measure performance. The key component of horizontal analysis is calculating the changes in financial statement items over these periods. This is done using two primary formulas: one for the absolute change and one for the percentage change.

Absolute Change Formula

The absolute change measures the difference in the value of a financial statement item between two periods.

Absolute Change = Value in Current Period - Value in Base Period

Percentage Change Formula

The percentage change expresses the absolute change as a percentage of the base period value, providing a relative measure of the change.Percentage Change

= (Absolute Change / Value in Base Period) × 100

Step-by-Step Example

Let's illustrate these formulas with a practical example using revenue data for two consecutive years.

Example Data:

Year 1 Revenue: $500,000

Year 2 Revenue: $600,000

Step 1: Calculate Absolute Change

Absolute Change = $600,000 - $500,000 = $100,000

Step 2: Calculate Percentage Change

Percentage Change = ($100,000 / $500,000) × 100 = 20%Thus, the revenue increased by $100,000 or 20% from Year 1 to Year 2.

Practical Applications

These formulas can be applied to various financial statement items, including revenue, expenses, net income, assets, liabilities, and equity. By systematically calculating the absolute and percentage changes, analysts can derive meaningful insights into the financial trends and performance of a company over time.

Extended Example

To further understand the application, let's consider another example involving net income over three years.

Year 1 Net Income: $50,000

Year 2 Net Income: $70,000

Year 3 Net Income: $90,000

Step-by-Step Calculation:

Year 1 to Year 2:

Absolute Change: $70,000 - $50,000 = $20,000

Percentage Change: (($20,000 / $50,000) × 100 = 40%

Year 2 to Year 3:

Absolute Change: $90,000 - $70,000 = $20,000

Percentage Change: (($20,000 / $70,000) × 100 = 28.57%

Summary of Results:

Net Income increased by $20,000 (40%)

Net Income increased by $20,000 (28.57%)

Through horizontal analysis, we can observe that while the absolute increase in net income remained the same ($20,000), the rate of growth slowed down in the third year compared to the second year.

Comparative Balance Sheets With Horizontal Analysis

The Balance Sheet In Detail

Comparative Income Statement With Horizontal Analysis

Cash Flow Statement In Detail

Horizontal Analysis vs. Vertical Analysis: What is the Difference?

Vertical Financial Statement Analysis

Download Horizontal Analysis Template

Horizontal analysis is a vital tool in the arsenal of financial analysts, offering a dynamic view of a company's financial health over time. By providing insights into trends, growth rates, and performance metrics, this technique supports more informed and strategic decision-making. While it should be used in conjunction with other analytical methods, horizontal analysis remains a cornerstone of thorough financial analysis.

Frequently Asked Questions (FAQs)

What is the difference between horizontal analysis and vertical analysis?

Horizontal analysis compares financial data over multiple periods, while vertical analysis compares different line items within a single period.

How is horizontal analysis used in forecasting?

Horizontal analysis provides historical trends that can be used as a basis for forecasting future financial performance.

Can horizontal analysis be used for non-financial data?

While horizontal analysis is primarily used for financial data, it can also be applied to non-financial data to identify trends and patterns.

What other financial analysis methods complement horizontal analysis?

Vertical analysis, ratio analysis, and cash flow analysis are commonly used alongside horizontal analysis to gain a comprehensive understanding of a company's financial position.

How often should horizontal analysis be conducted?

Horizontal analysis can be performed annually or over any other relevant period, depending on the specific requirements and objectives of the analysis.

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Horizontal Analysis

Published on :

21 Aug, 2024

Blog Author :

Wallstreetmojo Team

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya

What is Horizontal Analysis?

Based on historical data, a horizontal analysis interprets the change in financial statements over two or more accounting periods. It denotes the percentage change in the same line item of the next accounting period compared to the value of the baseline accounting period.

Table of contents

Understanding horizontal analysis, horizontal analysis formula, horizontal analysis example, colgate horizontal analysis, uses in financial modeling.

• Horizontal Analysis Video

Recommended Articles

• The horizontal analysis examines changes in financial statements over multiple accounting periods, providing insights into trends and comparing line items.
• It calculates the percentage change in specific line items between the current and previous accounting periods.
• Horizontal analysis is useful for financial modeling, forecasting, and identifying trends such as Year over Year (YoY) or Quarter over Quarter (QoQ) changes.
• The horizontal analysis enables predictions of future trends by analyzing consecutive years' data and comparing each item.

The horizontal analysis evaluates trends Year over Year (YoY) or Quarter over Quarter (QoQ). If you are an investor considering investing in a company, only a year-end balance sheet or income statement would not be enough to judge how a company is doing. It would help if you looked at a couple of years to be sure. Better yet, you can see many years of balance sheets and income statements and compare them.

Through horizontal analysis of financial statements, you would be able to see two actual data for consecutive years and would be able to compare every item. And based on that, you can forecast the future and understand the trend.

You do not need special financial skills to ascertain the difference between the previous and last year’s data. However, it would be best if you had diligence, attention to detail, and a logical mind to decipher why the change happens.

In this GKSR example above, we can identify the YoY growth rate using a horizontal income statement analysis. In addition, it helps us identify potential areas of growth and concerns.

For example, in GKSR, we note that the  provision for income tax  has increased by 12.6%. However, revenues have increased by only 5.5%. Why did provisions increase at a higher rate? Also, there has been a comparatively higher growth of 9.1% in selling and admin costs. What could have contributed to this increase?

As we see, we can correctly identify the trends and develop relevant areas to target for further analysis.

Horizontal Analysis Explained in Video

First, we need to take the previous year as the base year and the last year as the comparison year. So, for example, let us say we are comparing 2015 and 2016. We will take 2015 as the base year and 2016 as the comparison year.

Horizontal Analysis formula = x 100

Let us assume that we are provided with the income statement data of ABC Co. We need to perform a horizontal analysis of the income statement of this company.

The following is a basic example of dividing our approach into two parts. First, we found the absolute difference between the comparative years.

• For example, change in sales = (30,00,000 – 28,00,000) = 200,000
• We find the  percentage change = 200,000/28,00,000 * 100 = 7.14%.

Likewise, we can do the same for all the other entries in the income statement.

Let us now look at the horizontal analysis of Colgate's income statement. First, Colgate's income statement's YoY growth rates from 2008 until 2015. Then, we calculate the growth rate of each of the line items concerning the previous year.

For example, to find the growth rate of net sales for 2015, the formula is (Net Sales 2015 – Net Sales 2014) / Net Sales 2014.

Here are the following observations from Colgate: -

• Colgate has seen a dip in net sales figures in the last two years. In 2015, Colgate saw a de-growth of -7.2%. Why?
• The  cost of sales  has decreased (positive from the company's point of view). Why is this so?
• Net income fell in the last three years, with a 36.5% decline in 2015.

Horizontal analysis is very useful for  Financial Modeling and Forecasting . The approach used here is pretty simple.

• Step 1 – Perform the horizontal analysis of the income statement and balance sheet historical data.
• Step 2 – You can assume future growth rates based on the YoY or QoQ growth rates.

Let us now look at Colgate 10K 2013 report. First, we noted that Colgate had not provided segmental information in the income statement. However, as additional information, Colgate has provided some details of segments on page 87. 

Since we 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. Please see the picture below. We have calculated the Year-over-Year growth rate for each segment.

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 in the Oral, Personal & Home Care, and  Pet Nutrition Segments . 

Frequently Asked Questions (FAQs)

Horizontal analysis allows for the comparison of financial data over time, highlighting trends, patterns, and changes in performance. It helps identify growth or decline areas, assess strategies' effectiveness, and make informed decisions. It enables businesses to track progress, evaluate financial stability, and identify potential risks or opportunities.

The horizontal analysis relies heavily on historical data, which may not accurately reflect future performance. It doesn't account for external factors or industry changes that may impact financial results. It may overlook qualitative aspects of business performance. Also, horizontal analysis alone may not provide a comprehensive understanding of a company's financial health and requires additional analysis and context.

The vertical analysis involves comparing financial data within a single period by expressing each line item as a percentage of a base figure, typically sales or revenue. It helps assess the composition and proportion of different components within financial statements. Horizontal analysis, on the other hand, compares financial data across multiple periods to analyze trends, changes, and growth rates. It focuses on identifying patterns and variations in performance over time.

This article is a guide to Horizontal Analysis. We discuss the formula of horizontal analysis on the income statement and balance sheet with examples. You may go through the following articles for further readings on financial analysis: -

• Examples of Horizontal Merger
• Components of Financial Statements
• Operating Income Formula

Horizontal Analysis of Financial Statements

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 13, 2023

Fact Checked

Why Trust Finance Strategists?

Table of Contents

Horizontal analysis: definition.

Horizontal analysis is an approach to analyzing financial statements .

It compares historical data, which includes ratios and line items, over a series of accounting periods. The accounting period can be a month, a quarter, or a year.

This method of analysis is also known as trend analysis .

The horizontal method of analysis is used to identify changes in financial statements over time and assess those changes.

A base year is initially selected as a benchmark. Either the data of the rest of the years is expressed as a percentage of the base year or an absolute comparison is performed. The base year comparison is known as base year analysis .

This method of analysis makes it easy for the financial statement user to spot patterns and trends over the years.

An absolute comparison involves comparing the amount of the same line of the item to its amounts in the other accounting periods. For example, comparing the accounts receivables of one year to those of the previous year. Any changes are analyzed then.

In percentage comparison, the increase or decrease in amounts is expressed as a percentage of the amount in the base year.

For example, if the base year amount of cash is $100, a 10% increase would make the current accounting period’s amount $110, whereas a 10% decrease would be $90.

Different ratios, such as earnings per share (EPS) or current ratio , are also compared for different accounting periods.

Horizontal Analysis: Explanation

Horizontal analysis focuses on the dollar and percentage changes that occur in specific accounts from year to year.

Determining the percentage change is important because it links the degree of change to the actual amounts involved. In this way, percentage changes are better for comparative purposes with other firms than are actual dollar changes.

For example, a $1 million increase in General Motors' cash balance is likely to represent a much smaller percentage increase than a corresponding $1 million increase in American Motors' cash balance.

To calculate percentage changes, you can use the following formula:

Percentage change = (Amount of dollar change / Base year amount) x 100

The base year is always the first year in the comparison.

For example, suppose that Safeway's total current assets were $1,729,146,000 in 2018 and $1,861,389,000 in 2019. This represents a dollar increase of $132,243,000 and a percentage increase of 7.65%, which is calculated as follows:

Percentage change = ($1,861,389,000 - $1,729,146,000 / 1,729,149,000) x 100

You can also use horizontal analysis in conjunction with both the balance sheet and the income statement .

In the example shown below, comparative balance sheets and income statements are given for Safeway Stores. The tables show the dollar and percentage changes.

Several interesting balance sheet changes are apparent in the tables below. In 2019, Safeway Stores increased its operating of fixed assets. There were rises of more than 12% in all categories of property other than transport equipment.

This increase in capital expenditures is also reflected on the liability side of the balance sheet. In particular, notes and debentures increased by over 53%.

In this discussion and analysis of operations, Safeway's management noted that the increase was due to a growing trend toward mortgage financing.

Comparative Balance Sheets With Horizontal Analysis

Comparative Income Statements With Horizontal Analysis

Horizontal analysis of income statements also produces worthwhile information.

For example, in Safeway Stores' balance sheets, both sales and the cost of sales increased from 2018 to 2019.

However, the percentage increase in sales was greater than the percentage increase in the cost of sales. This led to an increase in gross profit from 2018 to 2019.

Operating and administrative expenses also increased slightly and interest expense increased by over 12%. This resulted in only a slight increase in net income for 2019 over 2018.

The Usefulness of Horizontal Analysis

Consistency and comparability are generally accepted accounting principles (GAAP) .

Consistency is important when performing horizontal analysis of financial statements. When the same accounting standards are used over the years, the financial statements of the company are easier to compare and trends are easily analyzed.

Comparability means that a company’s financial statements can be compared to those of another company in the same industry.

Horizontal analysis enables investors, analysts, and other stakeholders in the company to see how well the company is performing financially.

A company’s financial performance over the years is assessed and changes in different line items and ratios are analyzed. Negative changes and trends are further investigated.

Horizontal analysis also makes it easier to detect when a business is underperforming.

For example, if a company starts generating low profits in a particular year, expenses can be analyzed for that year. This makes it easier to spot inefficiencies and specific areas of underperformance.

Ratios such as asset turnover, inventory turnover, and receivables turnover are also important because they help analysts to fully gauge the performance of a business.

For example, a low inventory turnover would imply that sales are low, the company is not selling its inventory, and there is a surplus. This could also be due to poor marketing or excess inventory due to seasonal demand .

Ratios such as earnings per share , return on assets , and return on equity are similarly invaluable. These ratios make problems related to the growth and profitability of a company evident and clear.

Liquidity ratios are needed to check if the company is liquid enough to settle its debts and pay back any liabilities . Horizontal analysis makes it easy to detect these changes and compare growth rates and profitability with other companies in the industry.

Let’s take a look at this simple example before we discuss any further.

Each item in a financial statement is compared to the base year. In this case, if management compares direct sales between 2007 and 2006 (the base year), it is clear that there is an increase of 3.2%.

This result would be concerning for the company's management. They would investigate this if they expected at least a 10% increase.

To provide another example, consider an investor who is seeking to invest and finds company C. Company C’s figures for the previous year are as follows: net income $2m and retained earnings $10m.

The current year's details are the following: net income $4m and retained earnings $12m. Net income has grown by 100% and retained earnings have increased by only 20%.

The investor now needs to make a decision based on their analysis of the figures, as well as a comparison to other similar figures.

Criticisms of Horizontal Analysis

Regardless of how useful trend analysis may be, it is regularly criticized.

One reason is that analysts can choose a base year where the company's performance was poor and base their analysis on it. In this way, the current accounting period (or any other accounting period) can be made to appear better.

Another problem with horizontal analysis is that some companies change the way they present information in their financial statements. This can create difficulties in detecting troublesome areas, making it hard to spot changes in trends.

Horizontal Analysis: Discussion

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.

Horizontal Analysis of Financial Statements FAQs

What is horizontal analysis.

Horizontal analysis is the use of financial information over time to compare specific data between periods to spot trends. This can be useful because it allows you to make comparisons across different sets of numbers.

How is the horizontal analysis performed?

By looking at the numbers provided by a company, you should see whether there are any large differences between one year and the next. It is also possible to perform this analysis with time series data to make direct comparisons with other companies.

When should the horizontal analysis be performed?

When Financial Statements are released, it is important to compare numbers from different periods in order to spot trends and changes over time. This can be useful in checking whether a company is performing well or badly, and identify areas where it may improve.

What does horizontal analysis involve?

Horizontal analysis involves looking at Financial Statements over time in order to spot trends and changes. This can be useful in identifying areas of concern for a business, as well as improving the performance of companies that are struggling.

Why is horizontal analysis important?

Horizontal analysis is important because it allows you to compare data between different periods and makes it easier to identify changes in trends. This can be helpful in making decisions about whether to invest in a company or not.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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No-BS Guide To Horizontal Analysis – Formulas And Examples

Horizontal analysis is your go-to method for comparing financial data across multiple periods. It’s like having a time machine for your finances, where you can spot trends, identify anomalies, and essentially read between the lines of those monotonous columns of numbers.

What Exactly is Horizontal Analysis?

Here’s the deal: horizontal analysis involves taking specific line items from your financial statements and comparing them over consecutive periods. Think year-over-year revenue growth or quarter-over-quarter changes in expenses. By doing this, you’re not just seeing what happened in one period, but understanding the story that unfolds over time.

Key Objectives and Purposes:

• Track Performance Over Time: See how different aspects of your business are evolving across accounting periods .
• Identify Trends: Spot positive or negative growth and profitability trends to make proactive decisions.
• Highlight Anomalies: Detect unusual changes that might need deeper investigation.
• Benchmark Against Competitors: Gauge your financial position versus competitors and relative to the industry standards.

Why Should You Care?

Let’s get real—if you’re in finance, you need to care about horizontal analysis. Here’s why:

• Better Decision-Making: When you know what’s really going on financially, you can make smarter decisions. Whether it’s cutting unnecessary costs or doubling down on what’s working, horizontal analysis gives you the ammo you need.
• Spotting Financial Health: Are revenues climbing while profits are stagnating? Or maybe expenses are skyrocketing without a clear reason? Horizontal analysis helps you catch these red flags early.
• Investor Relations: Investors love transparency. Showing them clear, comparative data builds trust and shows you’ve got your act together.
• Strategic Planning: Need to plan next year’s budget? Understanding past trends will help you forecast more accurately and set realistic goals.

Vertical Analysis Versus Horizontal Analysis

Vertical and horizontal analyses are both tools for financial statement analysis, but they differ in purpose.

• Vertical analysis helps you track the relative size of different items within one period, usually expressed as a percentage of total assets or revenue. This is useful for seeing if certain expenses or income categories are disproportionately high or low.
• Horizontal analysis shows how individual items have changed over time, usually expressed as a percentage change from a base year. This is helpful for understanding trends and identifying any unusual fluctuations.

Step-by-Step Process of Horizontal Analysis

Horizontal analysis is one of my favorite tools to dig into a company’s financial performance. It’s a simple process that follows four steps:

Step 1: Gathering Financial Statements

Let’s kick things off with the basics. The first step in horizontal analysis is grabbing the company’s financial statements. We’re talking about the Income Statement and Balance Sheet—the bread and butter of financial reporting.

Which Statements You Need:

• Balance Sheet: This bad boy shows your assets, liabilities, and equity at a specific point in time (usually the end of an accounting period). It’s like your company’s health report.
• Income Statement: Also known as the Profit and Loss Statement (P&L), this one reveals your revenues, expenses, and profits over a period. Think of it as the scoreboard showing how well you played financially.

Tips on Where to Find Accurate Data:

• Internal Records: Your company’s accounting software or ERP system.
• Financial Reports: Annual reports, quarterly filings, and any other official financial documents.
• Online Sources: For public companies, check out resources like the SEC’s EDGAR database.

Step 2: Selecting the Time Periods for Comparison

Next up, you need to decide which periods you’re comparing. Consistency is key here, folks. Pick intervals that make sense—like year-over-year or quarter-over-quarter comparisons.

Importance of Consistency in Time Periods:

• Keep it apples-to-apples. Comparing different time spans can distort the picture and lead to misguided conclusions.
• Year-over-Year: Comparing Q1 2023 to Q1 2024.
• Quarter-over-Quarter: Comparing Q1 2024 to Q2 2024.

Step 3: Calculating the Changes

Now, let’s roll up our sleeves and do some math. You’ll be calculating both dollar changes and percentage changes.

Horizontal Analysis Formula

• Dollar Change: Current Period Value – Previous Period Value = Dollar Change
• Percentage Change: ((Current Period Value – Previous Period Value) / Previous Period Value) * 100 = Percentage Change

Detailed Walkthroughs with Examples:

• Example 1: Let’s say Sales Revenue in 2023 was $500,000, and in 2024 it’s $600,000.
• Dollar Change: $600,000 – $500,000 = $100,000
• Percentage Change: (($600,000 – $500,000) / $500,000) * 100 = 20%

Step 4: Analyzing the Results

You’ve gathered your data and crunched the numbers. Now comes the fun part—analyzing what these changes mean to business performance.

What to Look For (Trends, Anomalies, etc.):

• Trends: Are sales steadily increasing? Is there a pattern in expense growth?
• Anomalies: Did operating expenses spike suddenly? If so, why?

How to Interpret the Findings in a Meaningful Way:

• Context is King: A 20% increase in sales is great, but if your expenses also shot up by 25%, your profit margins are taking a hit.
• Look for Causes: Don’t just stop at the numbers. Dig deeper to understand the ‘why’ behind the changes. Maybe a new marketing campaign boosted sales, or perhaps an unexpected repair cost inflated expenses.

By following these steps, you’ll transform those intimidating columns of numbers into actionable insights. And remember, horizontal analysis isn’t just about identifying trends—it’s about understanding the story your financial data is telling you. So grab your calculator and get ready to decode your financial statements like a pro.

Case Studies Of Performing Horizontal Analysis

Alright, buckle up, because it’s time to put theory into practice. We’re diving into some real-life examples that’ll make horizontal analysis as easy as pie—or at least easier than understanding your phone bill.

Example 1: ABC Corp Income Statements Analysis

Picture this: You’re analyzing ABC Corp’s income statement , comparing 2023 to 2024. Here’s how it goes down:

• 2023: $500,000
• 2024: $600,000
• 2023: $300,000
• 2024: $350,000

Net Income:

• 2023: $200,000
• 2024: $250,000

Step-by-Step Calculations:

• Dollar Change in Revenues:
• $600,000 (2024) – $500,000 (2023) = $100,000
• Percentage Change in Revenues:
• (($600,000 – $500,000) / $500,000) * 100 = 20%
• Dollar Change in Expenses:
• $350,000 (2024) – $300,000 (2023) = $50,000
• Percentage Change in Expenses:
• (($350,000 – $300,000) / $300,000) * 100 = 16.67%
• Dollar Change in Net Income:
• $250,000 (2024) – $200,000 (2023) = $50,000
• Percentage Change in Net Income:
• (($250,000 – $200,000) / $200,000) * 100 = 25%

Interpretation:

So, what’s the tea here? Revenues jumped by 20%, which is fantastic. Expenses grew by 16.67%, but not as quickly as revenues—always a good sign. Net income saw a 25% increase, which means ABC Corp is keeping more of that extra revenue as profit. High five, ABC Corp!

Example 2: XYZ Ltd Balance Sheet Analysis

Now, let’s shift gears and look at XYZ Ltd’s balance sheet. We’re comparing Q1 2024 to Q2 2024.

• Q1 2024: $1,000,000
• Q2 2024: $1,200,000

Liabilities:

• Q1 2024: $400,000
• Q2 2024: $500,000
• Q1 2024: $600,000
• Q2 2024: $700,000

Detailed Analysis with Insights:

• Dollar Change in Assets:
• $1,200,000 (Q2) – $1,000,000 (Q1) = $200,000
• Percentage Change in Assets:
• (($1,200,000 – $1,000,000) / $1,000,000) * 100 = 20%
• Dollar Change in Liabilities:
• $500,000 (Q2) – $400,000 (Q1) = $100,000
• Percentage Change in Liabilities:
• (($500,000 – $400,000) / $400,000) * 100 = 25%
• Dollar Change in Equity:
• $700,000 (Q2) – $600,000 (Q1) = $100,000
• Percentage Change in Equity:
• (($700,000 – $600,000) / $600,000) * 100 = 16.67%

Here’s the scoop: XYZ Ltd’s assets grew by 20%, which is a solid gain. Liabilities shot up by 25%, which could raise some eyebrows—why are they taking on more debt? Equity increased by 16.67%, suggesting the company’s net worth is on the rise, but you might want to dig into why liabilities are climbing faster than equity. Could be expansion, could be a cash flow issue. Either way, it’s something to keep an eye on.

Common Pitfalls and How to Avoid Them

Let’s cut through the noise and get straight to the nitty-gritty of horizontal analysis. You’ve got your numbers, you’ve done the math, but there are still some landmines that can blow up your carefully crafted analysis. Here’s how to spot them before they spot you.

Misinterpreting Data

You know the saying, “Numbers don’t lie”? Well, that’s only half true. Numbers might not lie, but people sure do misinterpret them. Here are some classic blunders and how to dodge them:

Common Errors:

• Comparing Apples to Oranges: Don’t compare quarterly data to annual data unless you enjoy headaches. Always make sure you’re comparing like with like.
• Selective Memory: Focusing only on the periods that look good and ignoring the bad ones. Trust me, it’ll come back to haunt you.

How to Spot and Avoid Them:

• Consistency is Key: Keep your comparison periods uniform and use the same accounting methods. If you’re comparing Q1 this year, make sure it’s against Q1 last year.
• Context Matters: Look at the bigger picture. A spike in sales could be due to a one-time event like a major sale, not a sustainable trend.

Ignoring External Factors

Here’s a little secret: Your financials don’t exist in a vacuum. Market conditions, industry trends, and macroeconomic factors are all playing their part in your numbers game.

The Impact of Market Conditions and Other Variables:

• Economic Downturns: Sometimes, it’s not you; it’s the economy. A dip in revenue during a recession doesn’t mean you’re doomed—it means you’re human.
• Industry Trends: Are your competitors in the same industry seeing the same trends ? If everyone’s cutting costs, maybe there’s a broader market shift at play.

How to Account for Them:

• Stay Informed: Keep an eye on industry reports, economic news, and competitor performance. Knowledge is power, folks.
• Adjust Your Lens: When external factors change, adjust your analysis to account for these variables. It’s not cheating; it’s being smart.

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FP&A Leader | Digital Finance Advocate | Small Business Founder

Mike Dion brings a wealth of knowledge in business finance to his writing, drawing on his background as a Senior FP&A Leader. Over more than a decade of finance experience, Mike has added tens of millions of dollars to businesses from the Fortune 100 to startups and from Entertainment to Telecom. Mike received his Bachelor of Science in Finance and a Master of International Business from the University of Florida, laying a solid foundation for his career in finance and accounting. His work, featured in leading finance publications such as Seeking Alpha, serves as a resource for industry professionals seeking to navigate the complexities of corporate finance, small business finance, and finance software with ease.

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Horizontal Analysis: Definition, Process, Examples

By Hady ElHady

July 5, 2023

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Financial analysis plays a crucial role in assessing the performance and financial health of a company. One essential technique in financial analysis is horizontal analysis , which allows you to analyze and interpret changes in financial statement data over time. In this guide, we will provide you with a comprehensive understanding of horizontal analysis , its significance, and how to conduct it effectively.

What is Horizontal Analysis?

Horizontal analysis , also known as trend analysis , is a financial analysis technique that compares and evaluates the changes in financial statement data over a specific period. It involves analyzing year-to-year variations in financial metrics to identify trends, patterns, and shifts in a company’s financial performance. By examining the historical data and calculating percentage changes, horizontal analysis helps in understanding the direction and magnitude of changes, enabling informed decision-making and strategic planning .

Why is Horizontal Analysis Important in Financial Analysis?

Horizontal analysis plays a crucial role in financial analysis for several reasons:

• Identification of Trends and Patterns : Horizontal analysis helps identify long-term trends and patterns in financial data . By analyzing year-to-year changes, it becomes possible to understand the overall trajectory of a company’s financial performance, whether it is experiencing consistent growth, stability, or decline.
• Assessment of Financial Performance : Examining changes in key financial metrics over time allows for an assessment of a company’s financial performance. It helps gauge the effectiveness of revenue generation, expense management, and profitability . Horizontal analysis provides insights into a company’s ability to generate sustainable growth and maintain financial health .
• Detection of Anomalies and Red Flags : By conducting horizontal analysis, analysts can identify anomalies or deviations from expected trends. Unusual fluctuations or unexpected patterns may indicate underlying issues that require further investigation. Horizontal analysis serves as an alert mechanism for potential financial irregularities or risks.
• Comparative Analysis : It enables the comparison of financial data across different periods, facilitating benchmarking and industry analysis. By comparing a company’s performance to industry peers or historical performance, it becomes possible to evaluate relative strengths, weaknesses, and areas of improvement. This comparative perspective provides valuable insights for decision-making and goal setting.
• Strategic Planning and Forecasting : Horizontal analysis assists in strategic planning by providing a historical context for future projections. Understanding past trends and patterns allows companies to make more accurate forecasts, set realistic goals, and develop effective strategies for growth, cost management, and risk mitigation.
• Investor and Stakeholder Communication : It helps in effectively communicating a company’s financial performance to investors and stakeholders. It provides a clear picture of the company’s historical growth, stability, and financial position, instilling confidence and transparency. This analysis aids in building trust and attracting potential investors and stakeholders.

Overall, horizontal analysis is a valuable tool in financial analysis as it allows for the identification of trends, assessment of performance, detection of anomalies, comparative analysis , strategic planning, and effective communication. By leveraging the insights gained from horizontal analysis, businesses can make informed decisions, mitigate risks, and drive sustainable growth.

Understanding Horizontal Analysis

How to do horizontal analysis.

Horizontal analysis, also known as trend analysis , involves the comparison of financial statement data across multiple periods to identify trends, patterns, and changes. By examining year-to-year changes in key financial metrics, you can gain insights into a company’s growth, stability, and overall performance.

To perform horizontal analysis, follow these steps:

• Selecting the Financial Statements to Analyze : Choose the relevant financial statements , such as the income statement , balance sheet , and cash flow statement, based on the specific analysis goals.
• Gathering Historical Financial Data : Collect the financial data for the selected periods.
• Adjusting for Inflation (if applicable) : If inflation has affected the financial data, adjust the figures using appropriate inflation adjustment methods.
• Calculating Year-to-Year Changes : Calculate the percentage change between the data points for each period, highlighting the variations.
• Analyzing and Interpreting the Results : Analyze the trends, patterns, and variations to gain insights into the company’s financial performance.

Key Objectives of Horizontal Analysis

Horizontal analysis serves several important objectives in financial analysis:

• Identifying Trends and Patterns : By comparing financial data over time, you can identify recurring trends, cyclical patterns, and anomalies that may impact business operations.
• Assessing Financial Performance : Horizontal analysis helps assess a company’s financial performance by examining changes in revenues , expenses , profits , assets , and liabilities .
• Evaluating Business Stability : Analyzing trends in financial ratios and metrics can provide insights into a company’s stability and ability to withstand economic fluctuations.
• Supporting Decision-Making : Horizontal analysis offers valuable information for decision-making processes, such as budgeting , forecasting, and strategic planning.

Types of Data Used in Horizontal Analysis

Horizontal analysis involves the analysis of various financial statements:

• Income Statement Analysis : Analyzing changes in revenues , expenses , and net income over time.
• Balance Sheet Analysis : Examining changes in assets , liabilities , and equity from one period to another.
• Cash Flow Statement Analysis : Assessing variations in cash inflows and outflows, operating activities, investing activities, and financing activities.

How to Perform Horizontal Analysis?

To conduct horizontal analysis effectively, follow this step-by-step process:

Step 1: Selecting the Financial Statements to Analyze

Start by choosing the financial statements that are relevant to your analysis objectives. Consider which statements provide the most meaningful insights based on your analysis goals.

Step 2: Gathering Historical Financial Data

Collect the historical financial data for the selected periods. Ensure the accuracy and completeness of the data, as any inaccuracies can affect the analysis results.

Step 3: Adjusting for Inflation (if applicable)

If inflation has influenced the financial data, it is essential to adjust the figures to account for its impact. One common method is using an inflation index or Consumer Price Index (CPI) to calculate the inflation-adjusted values.

Step 4: Calculating Year-to-Year Changes

Calculate the year-to-year changes by comparing the financial data for each period. This can be done by using the following formula:

(CurrentPeriodValue−PreviousPeriodValue)/PreviousPeriodValue×100

For example, to calculate the percentage change in revenue :

(2021 R e v e n u e ​ − 2020 R e v e n u e ) /2020 R e v e n u e ​ × 100

Step 5: Analyzing and Interpreting the Results

Analyze the calculated percentage changes and interpret the results. Look for significant variations, both positive and negative, and identify any trends or patterns that emerge.

How to Interpret Horizontal Analysis Results?

When interpreting the results of horizontal analysis, consider the following key aspects:

Identifying Trends and Patterns

Analyzing the year-to-year changes helps identify long-term trends and patterns. Look for consistent positive or negative changes in financial metrics to assess the overall direction and performance of the company.

Analyzing Year-to-Year Changes

Carefully examine the percentage changes to understand the magnitude and significance of variations. Look for major fluctuations that may indicate critical events or shifts in the company’s operations.

Evaluating the Significance of Variations

Not all variations in financial metrics are equally significant. Evaluate the size of the changes relative to the company’s size, industry benchmarks, and historical performance. Smaller variations may be within an acceptable range, while larger variations may require further investigation.

Assessing Business Performance and Financial Health

Horizontal analysis provides insights into a company’s financial performance and health. By assessing the changes in revenues, expenses, profits , assets, and liabilities, you can gauge the overall financial well-being of the organization.

Key Metrics and Ratios in Horizontal Analysis

Several key metrics and ratios are used in horizontal analysis to evaluate financial performance:

Common-Size Statements

Common-size financial statements express each line item as a percentage of a base amount, typically total revenue or total assets. This allows for easy comparison and identification of trends across different periods.

Percentage Changes

Percentage changes show the year-to-year variations in financial metrics and help determine the growth or decline rate of the company’s performance.

Compound Annual Growth Rate (CAGR)

CAGR measures the average annual growth rate of a financial metric over a specific period. It helps determine the consistent growth rate, smoothing out fluctuations in year-to-year changes.

Variance Analysis

Variance analysis compares actual financial performance with the expected or budgeted performance. By identifying and analyzing variances, you can gain insights into the factors driving the deviations from the planned targets.

Trend Analysis

Trend analysis examines the direction and magnitude of changes in financial metrics over an extended period. It helps identify recurring patterns and assess the long-term performance of the company.

Advantages and Limitations of Horizontal Analysis

Advantages of horizontal analysis.

Horizontal analysis offers several advantages in financial analysis:

• Trend Identification : It helps identify long-term trends, patterns, and cycles in financial performance.
• Comparative Analysis : It allows for easy comparison of financial data across multiple periods.
• Performance Evaluation : It provides insights into the company’s financial performance and helps assess its growth and stability over time.
• Decision Support : It offers valuable information for decision-making processes, such as budgeting , forecasting, and strategic planning.

Horizontal Analysis Limitations and Challenges

Despite its benefits, horizontal analysis has some limitations and challenges that need to be considered:

• Seasonal Variations : Seasonal fluctuations in business operations can impact the accuracy of year-to-year comparisons.
• Inflationary Effects : Inflation can distort the analysis results if not properly adjusted.
• Changes in Accounting Methods : Changes in accounting methods between periods can affect the comparability of financial data.
• Comparability Issues : Differences in business models, industry dynamics, and company size can make comparisons across companies challenging.

Industry Benchmarking and Peer Analysis

To gain further insights from horizontal analysis, consider industry benchmarking and peer analysis:

Comparing Financial Performance to Industry Averages

Benchmark the company’s financial performance against industry averages or key competitors. This helps identify areas where the company excels or lags behind the industry norms.

Analyzing Competitors’ Financial Statements

Analyze the financial statements of key competitors to gain a broader understanding of industry dynamics and identify areas for improvement or potential competitive advantages.

Using Ratios for Comparative Analysis

Utilize financial ratios , such as profitability ratios , liquidity ratios , and solvency ratios , to compare the company’s financial performance with industry benchmarks and competitors. This provides a comprehensive view of the company’s relative strengths and weaknesses.

Horizontal Analysis Best Practices

To ensure accurate and meaningful results in horizontal analysis, follow these best practices:

Data Quality and Accuracy

• Use reliable and up-to-date financial data for analysis.
• Ensure data accuracy by verifying the information from credible sources.

Consistency in Financial Reporting

• Use consistent accounting methods and policies across all periods.
• Avoid changes in reporting standards or practices that may affect comparability.

Comparative Analysis Across Multiple Years

• Include multiple years of data for a comprehensive analysis.
• Consider the company’s historical performance trends for a more accurate assessment.

Regular Monitoring and Trend Analysis

• Continuously monitor and update the financial data to track ongoing trends.
• Conduct periodic horizontal analysis to assess the changes in financial performance.

Incorporating Qualitative Factors

• Consider qualitative factors, such as market trends, industry developments, and company-specific events, to provide context and deeper insights into the analysis.

Horizontal Analysis Examples

To further illustrate the practical application of horizontal analysis, let’s explore a few more examples that showcase its effectiveness in assessing financial performance and identifying trends.

Example 1: Revenue Analysis for Company A

Let’s consider Company A, a technology firm, and analyze its revenue trends over a five-year period using horizontal analysis. Here’s a simplified representation of their revenue data:

By calculating the year-to-year percentage changes, we can assess the revenue growth rates:

• From 2019 to 2020: ($120 – $100) / $100 * 100 = 20%
• From 2020 to 2021: ($150 – $120) / $120 * 100 = 25%
• From 2021 to 2022: ($180 – $150) / $150 * 100 = 20%
• From 2022 to 2023: ($200 – $180) / $180 * 100 = 11.11%

Through horizontal analysis, we observe that Company A has experienced consistent revenue growth over the five-year period. The growth rates of 20%, 25%, 20%, and 11.11% indicate a positive trend in the company’s revenue generation.

Example 2: Expense Analysis for Company B

Let’s consider Company B, a retail company, and analyze its expense trends over a three-year period. Here’s a simplified representation of their expense data:

By calculating the year-to-year percentage changes, we can assess the expense growth rates:

• From 2019 to 2020: ($55 – $50) / $50 * 100 = 10%
• From 2020 to 2021: ($60 – $55) / $55 * 100 = 9.09%

Based on the horizontal analysis, we observe that Company B’s operating expenses have gradually increased over the three-year period. The growth rates of 10% and 9.09% indicate a consistent upward trend in the company’s expenses.

Example 3: Asset Analysis for Company C

Let’s consider Company C, a manufacturing company, and analyze its total assets over a four-year period. Here’s a simplified representation of their asset data:

By calculating the year-to-year percentage changes, we can assess the asset growth rates:

• From 2019 to 2020: ($550 – $500) / $500 * 100 = 10%
• From 2020 to 2021: ($600 – $550) / $550 * 100 = 9.09%
• From 2021 to 2022: ($650 – $600) / $600 * 100 = 8.33%

From the horizontal analysis, we observe that Company C has experienced consistent growth in total assets over the four-year period. The growth rates of 10%, 9.09%, and 8.33% indicate a positive trend in the company’s asset accumulation.

These examples demonstrate how horizontal analysis enables us to identify trends and patterns in various financial metrics. By analyzing changes in revenue, expenses, and assets over time, companies can make informed decisions and better understand their financial performance.

Horizontal analysis is a powerful tool for understanding and evaluating a company’s financial performance over time. By examining year-to-year changes in key financial metrics, you can identify trends, assess stability, and make informed business decisions. Remember to consider industry benchmarks, peer analysis, and best practices to ensure accurate and meaningful results. By incorporating horizontal analysis into your financial analysis toolkit, you can gain valuable insights into your company’s performance and drive strategic growth.

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Horizontal Analysis

By Victoria Collin |

September 23, 2021

What is “Horizontal Analysis”?

Horizontal Analysis is an analytical method used to compare financial statements – primarily the balance sheet and income statement – based on historical data, in order to uncover the financial performance of a company or companies over a specified period of time. To conduct horizontal analysis i.e. evaluate underlying trends, it’s essential to compare financial statements of a company or companies over two or more accounting periods.

Carrying out horizontal analysis of the income statement and balance sheet helps investors and creditors to determine the current financial position of a company. By looking at past performance, it can help assess growth rates, spot trends (by comparing changes from period to period), generate forecasts, or project the insights gained into the future. Horizontal analysis can help evaluate a company’s financial standing or position vis-à-vis its competitors.

Key Learning Points

• Horizontal analysis compares the financial performance of a company (or companies) over a given period of time by looking at the historical financial statements
• In horizontal analysis, the year-over-year changes (or alternative) in the line items of the financial statements of a company or between the base year (year 1) and year 3 or more are expressed in absolute terms ($) and in percentages (%)
• It is useful for uncovering trends in the financial performance of a company
• Horizontal analysis is used by investors to help decide whether or not to invest in a particular company

Horizontal Analysis – Formula

In horizontal analysis, the changes in specific items in financial statements i.e. net debt on the balance sheet or revenue on the income statement– are expressed as a percentage and in a specific currency – for example, the U.S. dollar.

The horizontal analysis involves two types of formulas – one to compute percentage change and the other to calculate the absolute change in a specific currency.  For example, take the income statement of a company and we can select a line item, e.g. net income. The formula for horizontal analysis will be:

Historical analysis (%) = net income in year 2 – net income in the base year (year 1) / net income in a base year * 100

Note, year 2 is the comparison year. If the comparison year is year 3, then we will input the net income of year 3 and compute the percentage change between year 3 and year 1 (base year).

Horizontal Analysis (US$) = Net income in year 2 – Net income in the base year (year 1)

We use the same formula for other items in the income statement and balance sheet.

These formulas are used to evaluate trends which can either be quarter-on-quarter or year-on-year depending on the accounting period from which the data is sourced. For horizontal analysis, it’s best to take several years of historical data to gain useful insights into how a company is performing. This can help determine what is a clear trend and what may be a one-off event.

Horizontal Analysis – Percentage Change

To perform horizontal analysis vis-à-vis either the income statement or the balance sheet, we will have to first compare the financial results i.e. the change in the line items from one accounting period to the other in order to discern if the change from one period to the other is positive or negative and how strong is the growth or decline.

For example, let’s take the case of the income statement – if the gross profit in year 1 was US$40,000 and in year 2 the gross profit was US$44,000, the difference between the two is $4,000. Here the change is positive and we can calculate the percentage change.

When we use percentage change, it is very useful to carry out a more in-depth analysis and identify trends. In the example above, the percentage change in the gross profit from year 1 to year 2 is calculated as 4,000/40,000 * 100 = 10%.

Using Horizontal Analysis for Forecasting

If we take historical data of the financial statements of a company for year 1 and year 2, then one can compare each item and how it has changed year-over-year. We can use this trend to project the line items for future years.

In other words, one can take year-on-year or quarter-on-quarter growth rates of all the items of the income statement or the balance sheet – based on the historical data. Thereafter, one can make assumptions about the future growth rates. For example, in the income statement, we can, based on historical data and trends, make assumptions about sales growth and then forecast the sales growth rates through the forecast periods.

Horizontal Analysis Example

Given below is a horizontal analysis in excel of a comparative income statement (i.e. year 1 – base, year 2, and year 3). Using the aforesaid formulas, we have computed the absolute change (in US$) and percentage change (%) of all line items in the income statement between year 1 (base year and year 3. This can be viewed from the last two columns and the formulas can be viewed in the Excel spreadsheet. This is the first type of horizontal analysis. This Excel sheet is available in our free downloads.

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. In other words, we can calculate how much net income increased or decreased from year 1 to year 3 (or for that matter any year). Here net income has decreased by $2,750 or 12% in year 3 when compared to year 1.

Secondly, in the second type of horizontal analysis, we are interested in knowing about the underlying trends in the line items of the income statement. For this, we compare the absolute change ($) and percentage change (%) in all the line items from one period to the other. One should ideally take three or more accounting periods/years to identify trends and how a company is performing from one year/accounting period to the next year/accounting period.

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. The computations of the same have been done in columns F and H.

Such analysis provides valuable insights into why any of these line items rose or fell sharply or markedly in year 2, compared to year 1. For example, net income could fall sharply in year 2, despite a rise in sales, due to a marked rise in the cost of goods sold, marketing expenses, administrative expenses, and/or depreciation expenses.

This type of analysis is also very useful if an investor wants to determine the performance of a company prior to investing in the same. For example, an investor may want to evaluate the performance of a company over the past year– relative to the base year in order, to decide whether it is worthwhile investing in this company or not.

Additional Resources

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What is Horizontal Analysis?

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Definition: Horizontal analysis, sometimes called trend analysis, is the process of comparing line items in comparative  financial statements  or financial ratios across a number of years in an effort to track the history and progress of a company’s performance. In other words, it’s a way for analysts to compare accounts or performance metrics over time to see if the company is improving or declining.

• What Does Horizontal Analysis Mean?

This formula for evaluation is typically done by either investors and internal company management since both need to understand how well a company is doing in order to make decisions. Investors have to make the decision whether or not they want to invest or sell their current investment; while management needs to know what moves to make in order to improve the future performance of the company.

Since, any line item in a financial statement or financial ratio can be compared across a period of time, it makes the horizontal analysis extremely useful for anyone trying to track a company’s performance over time.

An investor can see if a business is expanding and becoming more valuable or becoming less efficient and less valuable. For example, an investor can use the horizontal analysis of the balance sheet to track the earnings per share ratio on a company he is thinking about investing in. If the ratio continues to grow year over year, the investor’s analysis would show a positive trend and he would probably choose to invest in the company granted other metrics are equally as positive.

A manager, on the other hand, is concerned with the day-to-day operations of the company, so he uses this evaluation technique to pinpoint areas for improvement. For instance, a manager might compare cost of goods sold and profit margin over a two or three-year span to see how efficient the company is becoming. This comparison of income statements will give the manager not only a benchmark for future performance; it will also help him understand what needs to be changed in the future.

Alhtough this comparison is useful on its own, investors and management typically use both horizontal and  vertical analysis  technuques before making any decisions.

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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

• 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.

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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Horizontal Analysis of Financial Statements

Horizontal analysis of financial statements involves comparison of a financial ratio, a benchmark, or a line item over a number of accounting periods. This method of analysis is also known as trend analysis. Horizontal analysis allows the assessment of relative changes in different items over time. It also indicates the behavior of revenues, expenses, and other line items of financial statements over the course of time. 

The analyzing accounting periods can be two or more than two periods. The accounting period can be a month, a quarter, or a year. It is up to the analyst's discretion to choose the appropriate number of accounting periods. During the investment appraisal, the number of accounting periods for analysis is based on the time horizon under consideration.

Horizontal analysis is a method of financial statement analysis that compares financial data from one period to another. This technique is used to identify trends or changes in a company's financial performance over time and can be applied to various financial statements.  Horizontal analysis of financial statements can be performed on any of the item in the income statement, balance sheet and statement of cash flows . For example, this analysis can be performed on revenues, cost of sales, expenses, assets, cash, equity and liabilities. It can also be performed on ratios such as earnings per share (EPS), price earning ratio, dividend payout, and other similar ratio.

Horizontal analysis can be performed in one of the following two different methods i.e. absolute comparison or percentage comparison.

• Absolute Comparison:

One way to perform a horizontal analysis is to compare the absolute currency amounts of some items over time. For example, the cash balance at the end of one accounting period can be compared to other accounting periods. This method is helpful in identifying the items that are changing the most.

• Percentage Comparison:

The second method of horizontal analysis compares percentage differences in certain line items over a period of time. The absolute currency amounts are converted to percentages for comparison. For example, a change in cash from $5,000 to $5,500 is reported as a 10% increase in cash. It can also be reported as 110%, meaning that the cash is 110% of the cash at the end of the previous accounting period. This method is useful when comparing the performance of two companies of different scope and size.

Let's take an example of a company that has generated an income statement for the last two years.

Example of Horizontal Analysis

Income Statement

Absolute comparison : By using horizontal analysis, we can compare the income statement from Year 1 to Year 2 and evaluate the changes in both absolute and percentage terms.

Percentage c omparison : From the above example, we can see that the company's revenue has increased by 20% from Year 1 to Year 2, while the cost of goods sold has increased by 17.14%. This means that the company's gross profit has increased by 26.67%. We can also see that the company's net income has increased significantly by 42.86%. This indicates that the company's cost-cutting efforts have been successful and the company has been able to improve its profitability over the past year.

As a result, horizontal analysis is a helpful tool for analysts and investors to spot trends in a company's financial performance over time. This method can be applied to assess a company's financial standing and assist investors in making defensible investment choices. Investors can discover potential risks and opportunities that could affect a company's future financial performance by comparing financial data from one period to the next.

Horizontal Analysis vs. Vertical Analysis

Horizontal analysis and vertical analysis are two common methods of analyzing financial statements.

Horizontal analysis , also known as trend analysis, compares financial data over a specific period to identify changes and trends. The analysis compares line items from the same financial statement in different periods to identify whether there have been increases or decreases in the figures. The analysis can be conducted on both the income statement and the balance sheet, comparing the figures for multiple years or quarters.

For example, if a company’s revenue was $1 million in 2019 and $1.2 million in 2020, then the horizontal analysis would show a 20% increase in revenue. This method is useful for identifying trends and changes in a company’s financial performance.

On the other hand, vertical analysis , also known as common size analysis, involves analyzing financial statements by expressing each line item as a percentage of a base figure. The base figure can be either total assets for the balance sheet or total revenue for the income statement. The analysis provides insight into the relative importance of each item in the financial statement.

For example, if a company’s total assets are $10 million and inventory is $1 million, then the vertical analysis of the balance sheet would show inventory as 10% of total assets. This method is useful for comparing the relative importance of line items in the financial statement.

Both horizontal and vertical analysis are useful tools for analyzing financial statements and can be used together to gain a comprehensive understanding of a company’s financial performance. Horizontal analysis provides information on the trend of financial performance over time, while vertical analysis provides information on the relative importance of line items in the financial statement.

Horizontal and vertical analysis are commonly used by financial analysts, investors, and managers to gain insight into a company’s financial performance and to make informed decisions based on the analysis.

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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.

At least two accounting periods are required for a valid comparison, though in order to spot actual trends, it’s better to include three or more accounting periods when calculating horizontal analysis.

How detailed your initial financial statements are depends largely on the accounting software application you’re using. If you’re using an entry-level application, it’s likely you’ll need to use spreadsheets in order to complete the horizontal analysis.

Overview: What is horizontal analysis?

Horizontal, or trend, analysis is used to spot and evaluate trends over a specific period of time.

For instance, instead of creating a balance sheet or income statement for one specific period of time, you would also create a comparative income statement or balance sheet that covers quarterly or annual activity for your business.

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.

Horizontal analysis uses a line-by-line comparison to compare the totals. For example, if you run a comparative income statement for 2018 and 2019, horizontal analysis allows you to compare revenue totals for both years to see if it increased, decreased, or remained relatively stagnant.

Adding a third year to the analysis will be even more helpful, as you’ll be able to see if there is a definite trend.

Horizontal analysis vs. vertical analysis: What's the difference?

Horizontal analysis looks at changes line by line between specific accounting periods, usually quarterly or yearly, whereas vertical analysis restates balance sheet or income statement amounts as a percentage of total assets (balance sheet) or net sales (income statement).

While horizontal analysis is used to compare line items over specific periods of time in order to spot trends, vertical analysis is used to restate and compare changes in percentages, and is more frequently used by investors and creditors to compare company performance with other companies in the same industry.

How to perform a horizontal analysis

Use the following steps to begin performing a horizontal analysis:

Step 1: Run a comparative income statement and balance sheet for the periods you wish to compare. You’ll need a minimum of two periods to compare, but you’ll be able to spot trends much better if you use at least three periods.

Step 2: Decide how you want to approach your horizontal analysis. You have several options:

• Direct comparison: The direct comparison is simply comparing the results of one accounting period to another. For example, if your 2018 revenue was $20,000 and your 2019 revenue was $27,000, the difference would be $7,000. The comparison method allows you to quickly view any changes from period to period, and whether those changes are beneficial or require further research.
• Variance: You can choose to calculate the variance between your chosen periods to determine whether the impact was positive or negative. The variance method is particularly helpful when the horizontal analysis is being used to determine the financial health of your business by those outside the business, such as investors and creditors.
• Percentage: The percentage method is helpful if you’re looking for more in-depth analysis. Using the percentage method, the first period of your income statement or balance sheet is considered your base period, with each subsequent period comparing line-by-line results to the base year. For example, in the income statement below, the difference in revenue between 2017 and 2018 is $13,000, so you would use the following horizontal analysis formula to determine the percentage by which revenue increased:

$13,000 ÷ $54,000 x 100 = 24%

That means that from 2017 to 2018, your revenue increased by 24%.

To compare 2019 revenue to 2017 revenue, you’ll complete the following calculations:

$73,000 - $54,000 = $19,000 variance

$19,000 ÷ $54,000 x 100 = 35% increase in revenue

You can also choose to calculate income statement ratios such as gross margin and profit margin.

Horizontal Analysis - Income Statement

Step 3: Review your results. The quickest way to spot trends is to view the changes from period to period, but for more substantial analysis, you’ll want to view variances, either as dollar amounts or percentages.

If you’d rather see both variances and percentages, you can add columns in order to display changes in both. While this format takes the most time to create, it also makes it easier to spot trends and better analyze business performance. This method works best when you’re comparing two years side by side.

Using the comparative income statement above, you can see that your net income changed by $1,500 from 2017; a percentage increase of 5.3%, but what really stands out on the income statement is the 266% increase in depreciation expense.

If you purchased several fixed assets during 2018, the increase is easily explained, but if you didn’t, this would need to be researched.

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.

The example from Safeway Stores shows a comparative balance sheet for 2018 and 2019 following a similar format to the income statement above.

This example from Safeway Stores shows a horizontal analysis balance sheet. Image source: Author

Source: playaccounting.com.

Horizontal analysis helps you spot trends

While financial statements are essential for managing your business, an income statement or balance sheet for a single period of time will not tell the complete story. Horizontal analysis answers a lot of questions, including:

• How much has my revenue increased in the last quarter/year?
• Is my cost of goods sold going up or down?
• What areas of my business have seen the most changes?
• Is my net income increasing or decreasing?

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.

Whether you do a horizontal analysis quarterly or yearly, it’s worth the time and effort to perform this calculation regularly.

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Investigation of the temperature and horizontal freezing force of loess in three-dimensional freezing.

1. Introduction

2. materials and methods, 2.1. experimental details, 2.2. tps calibration curve test, 3. results and discussion, 3.1. temperature variation pattern, 3.2. analysis of freezing force test results, 3.3. effect of temperature on freezing force, 4. conclusions, author contributions, institutional review board statement, informed consent statement, data availability statement, conflicts of interest.

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Share and Cite

Yin, Y.; Liu, F.; Tang, D.; Chen, L.; Yang, B. Investigation of the Temperature and Horizontal Freezing Force of Loess in Three-Dimensional Freezing. Materials 2024 , 17 , 4614. https://doi.org/10.3390/ma17184614

Yin Y, Liu F, Tang D, Chen L, Yang B. Investigation of the Temperature and Horizontal Freezing Force of Loess in Three-Dimensional Freezing. Materials . 2024; 17(18):4614. https://doi.org/10.3390/ma17184614

Yin, Yidan, Fei Liu, Dongqi Tang, Longze Chen, and Binbin Yang. 2024. "Investigation of the Temperature and Horizontal Freezing Force of Loess in Three-Dimensional Freezing" Materials 17, no. 18: 4614. https://doi.org/10.3390/ma17184614

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