Horizontal Analysis: Definition, Formula & Examples

Horizontal analysis is a method for calculating the relative changes in financial performance over time. It involves comparing financial information from one year to another and analyzing the differences between them. This type of analysis will help you identify trends and measure how well a company performs against its competitors or previous years. A company’s financial performance over the years is assessed and changes in different line items and ratios are analyzed. As it is majorly carried out on a single time period, Vertical analysis is also known as static analysis.

For example, if you’re analyzing a retail company, you may want to look at inventory levels and sales. Liquidity ratios are needed to check if the company is liquid enough to settle its debts and pay back any liabilities. Horizontal analysis makes it easy to detect these changes and compare growth rates and profitability with other companies in the industry. As seen from the above example, every ratio is given in relation to the revenue in the case of income statement. How detailed your initial financial statements are depends largely on the accounting software application you’re using. If you’re using an entry-level application, it’s likely you’ll need to use spreadsheets in order to complete the horizontal analysis.

What is Horizontal Analysis of Financial Statements?

For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes. Another way to see this is where the base period was unusually poor, taking the year 2020 which was greatly affected by the COVID pandemic for example. What this means is that even with good intentions, periods that are rather average or even dangerous may appear to be great periods and a company does not get the most accurate idea of its financial health and environment. Drag down the cell with the formula to copy it to the other current assets line items.

• In horizontal analysis, the changes in specific financial statement values are expressed as a percentage and in U.S. dollars.
• In this article, you will learn everything you need to know about the horizontal analysis of financial statements.
• Select the base and comparison periods and the values for your chosen variable, then calculate the percentage change between them.
• 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.
• We will apply this formula to each line item to calculate its absolute change.
• Another way to see this is where the base period was unusually poor, taking the year 2020 which was greatly affected by the COVID pandemic for example.

If inflation has influenced the financial data, it is essential to adjust the figures to account for its impact. One common method is using an inflation index or Consumer Price Index (CPI) to calculate the inflation-adjusted values. Compared with one of its biggest competitors, Microsoft, horizontal analysis shows that Apple’s Revenue growth and gross profit margin were lower than Microsoft’s in both years. The presentation of the changes from year to year for each line item can be analyzed to see where positive progress is occurring over time, such as increases in revenue and profit and decreases in cost. Conversely, less favorable readings may be isolated using this approach and investigated further. For example, if a company starts generating low profits in a particular year, expenses can be analyzed for that year.

Step 3: Calculate the percentage changes in financial line items

By analyzing financial statements, your company accurately spots trends over time and identifies the mix of assets and liabilities it has to deal with within a certain period. Financial analysis helps you examine relationships between different financial items and determine efficient operations to manage them. Trend Analysis is a technique used to identify trends spanning different accounting periods by highlighting the changes in different financial statements when comparing items to each other. Horizontal analysis, also known as trend analysis, is used to spot financial trends over a specific number of accounting periods. Horizontal analysis can be used with an income statement or a balance sheet. Keep in mind that the comparative income statements and balance sheets for Banyan Goods are simplified for our calculations and do not fully represent all the accounts a company could maintain.

Now we are going to explain what Financial Analysis is in general, so we can understand more about this specific type of analysis. In conclusion, we’re able to compare the year-over-year (YoY) performance of our company from 2020 to 2021. The latter two tend to go hand-in-hand because the most horizontal analysis formula useful benchmark against which to compare recent performance is most often the preceding period. To standardize the output for the sake of comparability, the next step is to divide by the base period. Pies, Inc. was voted the best pies in the Southwest and the largest bakery in the state.

Example of Comparative Income Statement with Horizontal Analysis

Even though vertical analysis is a statement comparison within the same year, Banyan can use information from the prior year’s vertical analysis to make sure the business is operating as expected. For example, unearned revenues increased from the prior year to the current year and made up a larger portion of total liabilities and stockholders’ equity. This could be due to many factors, and Banyan Goods will need to examine this further to see why this change has occurred. Horizontal analysis, also known as trend analysis, involves the comparison of financial statement data across multiple periods to identify trends, patterns, and changes. By examining year-to-year changes in key financial metrics, you can gain insights into a company’s growth, stability, and overall performance. A notable problem with the horizontal analysis is that the compilation of financial information may vary over time.

After orientation with human resources, I have a meeting with my boss and other new hires in the finance department. Looking to streamline your business financial modeling process with a prebuilt customizable template? Say goodbye to the hassle of building a financial model from scratch and get started right away with one of our premium templates.