Chapter 3 Vertical & Horizontal Analysis PDF Balance Sheet Equity Finance

horizontal analysis

Maybe your property is already the market leader both in terms of revenue and efficiency, so your ability to further grow revenues and decrease expenses would be limited. Perhaps your competitive set does not really match your operation and you need to reassess it. Even though the Illustration Hotel’s Operating Revenue shows an upward horizontal analysis trend, it is not nearly as positive as its competitors’ average. Expenses seem to be more aligned with the set’s trend, but with revenues lagging far behind the average, this isn’t very good news either. In the end, compared to your competitors’ 15.3 percent increase, your humble 2.7 percent gain in GOP leaves a bitter aftertaste.

horizontal analysis

The caveat is that while the percentage point calculation focuses on the difference in the percentage magnitudes , the percent change shows the difference in the underlying measure . Your accounting team has prepared the P&L statement for the year 2018, and you want to assess how the current performance compares to that of 2017. A horizontal analysis of the trends in solvency ratios will reveal if the company is increasingly insolvent or stably solvent. Though there’s value in this approach, the current period may appear uncommonly good or bad, depending on the choice of the base year and the chosen accounting period the analysis begins with.


Given how 2020 was so widely different from years past, it’s hopefully an outlier for many industries as the global economy begins to recover from the pandemic. The comparability constraint dictates that your statements and documents need to be evaluated against companies similar to yours within the same industry. Horizontal analysis improves and enhances the constraints during financial reporting. By looking at the numbers provided by a company, you should see whether there are any large differences between one year and the next.

horizontal analysis

Operating income and net income have also witnessed higher growth due to a lower increase in SG&A expense and income tax, respectively. A further advantage is that it requires little skill to spot anomalies in a trend, while other forms of analysis may require extensive experience to discern whether the numbers in a presentation are indicative of problems. Step 2 – You can assume future growth rates based on the YoY or QoQ growth rates. For example, to find the growth rate of net sales for 2015, the formula is (Net Sales 2015 – Net Sales 2014) / Net Sales 2014. First, we need to take the previous year as the base year and the last year as the comparison year. These include white papers, government data, original reporting, and interviews with industry experts.


With this approach, you can also analyze relative changes between lines of products to make more accurate predictions for the future. For the greatest accuracy, you should ensure all the financial statements are prepared consistently according to the Generally Accepted Accounting Principles . The consistency constraint means that you have to use the same accounting methods and principles every year.

horizontal analysis

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. Third, horizontal analysis assumes that all items on the financial statements are equally important. However, some items may be more important than others in determining the health of the business.

What is horizontal and vertical analysis?

Horizontal analysis represents changes over years or periods, while vertical analysis represents amounts as percentages of a base figure. Horizontal analysis usually examines many reporting periods, while vertical analysis typically focuses on one reporting period.

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