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. 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. 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. This analysis helped companies to fix their goals and also helpful for the shareholders to highlight the weakness of the business programs and to find the way for their improvement.

A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Operating and administrative expenses also increased slightly and interest expense increased by over 12%. This type of analysis has the advantage of allowing for the visual identification of anomalies from long-term trends.

How to Perform Horizontal Analysis?

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

Horizontal analysis of income statements also produces worthwhile information. 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. 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. 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.

  • Another method of analysis MT might consider before making a decision is vertical analysis.
  • 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.
  • By comparing data sets side-by-side, you can identify upward or downward trends in revenue, expenses, and net sales.
  • For example, MT saw a 50% accounts receivable increase from the prior year to the current year.
  • For example, a statement that says revenues have increased by 10% this past quarter is based on horizontal analysis.

In this second example, I will do a horizontal analysis of Company B’s current assets based on the annual balance sheets. The two examples below show how to do horizontal analysis using Google Sheets, but you can easily do the same in Excel. The first example is based on a balance sheet, and the second is on an income statement.

What is the approximate value of your cash savings and other investments?

The horizontal method of analysis is used to identify changes in financial statements over time and assess those changes. Horizontal and vertical analysis are two types of analysis you can do that wave integration use simple mathematical formulas. Begin by accumulating financial statements from different quarters or years, as horizontal analysis is performed on financial statements throughout time.

Example 2: Expense Analysis for Company B

Other factors should also be considered, and only then should a decision be made. Horizontal analysis enables investors, analysts, and other stakeholders in the company to see how well the company is performing financially. However, the percentage increase in sales was greater than the percentage increase in the cost of sales.

Common Size Analysis of Financial Statements

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. One reason is that analysts can choose a base year where the company’s performance was poor and base their analysis on it.

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. 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.

Financial statement analysis can be used to evaluate a company’s liquidity, solvency, profitability, and overall financial position. Analyzing a company’s financial statements investors and comparing company performance with other companies in the same industry helps analysts to make informed decisions about whether or not to invest in the company. Vertical analysis requires numbers in a financial statement to be restated as percentages of a base dollar amount. For balance sheet analysis, total assets, or total liabilities and equity, are used as the base amounts.

The figure below shows the common-size calculations on the comparative income statements and comparative balance sheets for Mistborn Trading. The highlighted part of the figure shows the number used as the base to create the common-sizing. Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods.