Analysis and Interpretation of Financial Statements: Horizontal analysis and vertical analysis: An illustration Saylor Academy

For example, although other assets declined USD 6.3 million in 2010, the decrease of 1.4 per cent in the account represents only approximately 4.8 per cent of total assets and, therefore, probably does not have great significance. Vertical analysis also shows that total debt financing decreased from 78.0 per cent of total equities (liabilities and stockholders’ equity) in 2009, to 74.3 per cent in 2010. At the same time, the percentage of stockholder financing to total assets of the company increased from 22.0 per cent to 25.7 per cent.

They can use them externally to examine potential investments and the creditworthiness of borrowers, amongst other things. 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. 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. 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.

Advantages of Horizontal Analysis

Horizontal analysis looks at amounts from the financial statements over a horizon of many years. The amounts from past financial statements will be restated to be a percentage of the amounts from a base year. Ratios such as earnings per share, return on assets, and return on equity are similarly invaluable.

• Investor Warren Buffett is a well-known supporter of Graham and Dodd’s philosophy.
• Accountants create income statements using trial balances from any two points in time.
• This can be useful in checking whether a company is performing well or badly, and identify areas where it may improve.
• From the balance sheet’s horizontal analysis you may see that inventory and accounts payable have been growing as a percentage of total assets.
• Now we can assume a sales growth percentage based on the historical trends and project the revenues under each segment.
• This fact indicates that the company will be able to pay its debts as they come due.

In addition, for the hospitality industry, Smith Travel Research , CBRE, and HVS all provide various statistics, from operational to financial, for management and owners. If you work in the hotel segment of the hospitality industry and especially if you are in the front office, you might have heard of the the STAR report from STR.

Accounting and Accountability

These ratios make problems related to the growth and profitability of a company evident and clear. A company’s financial performance over the years is assessed and changes in different line items and ratios are analyzed.

Regardless, accounting changes and one-off events can be used to correct such an anomaly and enhance horizontal analysis accuracy. It is important to understand the concept of horizontal analysis because of the following reasons.

Liquidity Ratios

The year of comparison for horizontal analysis is analysed for dollar and percent changes against the base year. Your financial statements, including your balance sheet, income statement, and cash flow statement provide operational information and provide a clear picture of performance. These documents can also horizontal analysis formula show a company’s emerging successes and potential weaknesses, based on metrics such as inventory turnover, profit margin, and return on equity. The analysis of critical measures of business performance, such as profit margins, inventory turnover, and return on equity, can detect emerging problems and strengths.

(Miller & Goidel, 2009) Like in Nepal as well, the demand/sell of clothes and other appliances is higher during special festivals or occasions compared to other normal days. They can even have a complete picture of an operational result by analyzing financial statement, balance sheet, and cash flow statement at the same time. With it, the company can assess its profitability and operational efficiency while also looking at what has been driving the company’s performance.

Let us assume that we are provided with the income statement data of ABC Co. We need to perform a horizontal analysis of the https://www.bookstime.com/ income statement of this company. Looking at horizontal analysis, you can easily see why it’s also known as trend analysis.

The absolute change is determined by deducting the 2009 amount from the 2010 amount. If the change between two dates is an increase from 2009 to 2010, the change is a positive figure.