Horizontal Analysis vs. Vertical Analysis

Horizontal Analysis vs. Vertical Analysis


Horizontal analysis is a method of financial statement analysis that looks at changes in the amounts of corresponding financial statement items over a period of time. It is used to inspect trends, such as increases or decreases in accounts and to compare financial statements of different companies.


Vertical analysis is a method of financial statement analysis that shows each item on a statement as a percentage of a base figure. It is typically used to compare financial statements of different companies by evaluating each line item as a percentage of total sales or total assets. This analysis is most commonly used to compare the financial statements of different companies in the same industry.


Both methods of analysis are used to gain insight into the financial performance of a company. Horizontal analysis looks at changes in financial statement items over a period of time, while vertical analysis looks at each statement item as a percentage of a base figure. Both can be used to compare the financial statements of different companies in the same industry.


inclusive table of content


Introduction ................................................................................................................................. 1

Horizontal Analysis .................................................................................................................... 2

Vertical Analysis ........................................................................................................................ 3

Comparison ................................................................................................................................ 4

Conclusion .................................................................................................................................. 5

References .................................................................................................................................. 6


Introduction


Financial statement analysis is an important tool used by investors, lenders, and other stakeholders of a business to assess the financial health and performance of a company. Financial statement analysis involves analyzing the income statement, balance sheet, and cash flow statement of a company to gain insight into the company’s financial position and performance. Two common methods of financial statement analysis are horizontal analysis and vertical analysis.


Horizontal Analysis


Horizontal analysis is a method of financial statement analysis that looks at changes in the amounts of corresponding financial statement items over a period of time. This type of analysis is used to assess trends, such as increasing or decreasing accounts and to compare financial statements of different companies. This type of analysis is useful for understanding how a company’s performance has changed over time. It can also be used to compare the financial performance of different companies.


How to Perform a Horizontal Analysis


1. Select a base year. The base year is the year that will be used as the starting point for comparison.

2. Calculate the percentage increase or decrease of each item from the base year. To do this, divide the current year’s amount of the item by the base year’s amount of the item.

3. Compare the results of the percentage increase or decrease of each item to the industry average if available. This will provide insight into how the company is performing relative to its competitors.


a dummy example of a resturan business in a proper table format 


Horizontal Analysis (In Euros)


                Year 2020  Year 2021  Difference  % Change

Sales       100,000        120,000       20,000        20%

Costs       80,000         90,000        10,000        12.5%

Gross Profit 20,000        30,000        10,000        50%


Vertical Analysis


Vertical analysis is a method of financial statement analysis that shows each item on a statement as a percentage of a base figure. It is typically used to compare financial statements of different companies by evaluating each line item as a percentage of total sales or total assets. This analysis is most commonly used to compare the financial statements of different companies in the same industry.


How to Perform a Vertical Analysis


1. Select a base figure. The base figure is the total amount that will be used to calculate the percentage of each item. Commonly used base figures include total sales or total assets.


2. Calculate the percentage of each item. To do this, divide the amount of the item by the total base figure.


3. Compare the results of the percentage of each item to the industry average if available. This will provide insight into how the company is performing relative to its competitors.


A dummy example of a resturan business in a proper table format 


Vertical Analysis (In Euros)


Item          Amount        % of Total

Sales         120,000       100%

Costs         90,000        75%

Gross Profit   30,000        25%

Comparison


Horizontal analysis and vertical analysis are two methods of financial statement analysis that are used to gain insight into the financial performance of a company. Horizontal analysis looks at changes in financial statement items over a period of time, while vertical analysis looks at each statement item as a percentage of a base figure. Both can be used to compare the financial statements of different companies in the same industry.


Horizontal analysis is useful for understanding how a company’s performance has changed over time and for comparing the financial performance of different companies. Vertical analysis is useful for comparing the financial statements of different companies in the same industry.


Conclusion


Horizontal analysis and vertical analysis are two methods of financial statement analysis that are used to gain insight into the financial performance of a company. Horizontal analysis is useful for understanding how a company’s performance has changed over time and for comparing the financial performance of different companies. Vertical analysis is useful for comparing the financial statements of different companies in the same industry. Both methods of analysis can be used to assess the financial performance of a company and to compare it to other companies in the same industry.

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