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. In fact, there must be a bare minimum of at least data from two accounting periods for horizontal analysis to even be plausible. 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 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.
What Is the Difference Between Horizontal Analysis and Vertical Analysis?
Whether you do a horizontal analysis quarterly or yearly, it’s worth the time and effort to perform this calculation regularly. The example from Safeway Stores shows a comparative balance sheet for 2018 and 2019 following a similar format to the income statement above. 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. 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.
Step 3: Identify Trends and Patterns
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 typically shows the changes from the base period in dollar and percentage. For https://www.online-accounting.net/ 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.
Calculate % Change
- 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.
- 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.
- Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.
- Horizontal analysis, also known as trend analysis, involves the comparison of financial statement data across multiple periods to identify trends, patterns, and changes.
Horizontal analysis can also be used to benchmark a company with competitors in the same industry. You can choose to run a comparative balance sheet for the periods desired, or complete a side-by-side comparison of two years. Through solvency vs liquidity 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.
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. 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.
Given below is a horizontal analysis in excel of a comparative income statement (i.e. year 1 – base, year 2, and year 3). Financial analysis plays a crucial role in assessing the performance and https://www.online-accounting.net/contribution-margin-overview/ 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.
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. 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. 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.