12 7: Horizontal and Vertical Trend Analysis Business LibreTexts

The right time frame depends on your specific business needs and the insights you’re seeking. Performed periodically, it helps to monitor financial health and take corrective actions if required. For instance, a company might detect a sudden increase in accounts payable during account analysis, which can prompt them to analyze further and identify the root cause of this spike. When used with your company’s balance sheet, total assets or total liabilities would be used as the baseline figure, with all subsequent line items shown as a percentage of that total. Vertical analysis provides a different look at your financial statements, with each line item on your financial statement listed as a percentage of the established base figure.

Text Size

So far, we’ve focused on using vertical analysis as a way to analyze income statements. The same process applies, except the most commonly used denominator is total assets. A Common-Size Cash Flow Statement is a financial statement where each line item is expressed as a percentage of total cash inflows or outflows. Another crucial aspect of interpreting vertical analysis is identifying trends over time. Consistent changes in the percentages of specific line items can reveal underlying shifts in business operations or market conditions.

• Vertical analysis, on the other hand, involves analyzing financial statement items as a percentage of a base amount to understand the relative proportions of various components within a single period.
• Acterys takes the effectiveness of vertical analysis to the next level with its advanced features and capabilities.
• Vertical Analysis using the Balance Sheet can thus provide insights into the company’s operational efficiency.
• Financial statement analysis is a crucial skill for investors, managers, and stakeholders to assess the performance and financial health of a company.
• To increase the effectiveness of vertical analysis, multiple year’s statements or reports can be compared, and comparative analysis of statements can be done.
• According to a report by Deloitte, businesses that regularly use vertical analysis have a 20% higher chance of identifying financial anomalies early.

Vertical Analysis of Income Statement

This method allows for easy comparison of financial statements across different periods or companies, regardless of size. Vertical analysis is essential for assessing a company’s financial structure and performance. In vertical analysis, the base figure for the income statement is typically total revenue, while for the balance sheet, it is usually total assets. By converting absolute numbers into percentages, vertical analysis helps in identifying trends and patterns that might not be apparent through raw figures alone. This method enhances the ability to perform comparative analysis and make informed financial decisions.

Vertical Analysis of Financial Statements CFA Questions

For example, if Banyan Goods set total assets as the base amount and wanted to see what percentage of total assets were made up of cash in the current year, the following calculation would occur. Trend analysis extends the idea of horizontal analysis across three or more periods to spot underlying sustainable patterns, cyclical variations, or unusual anomalies. Instead of just comparing the most recent period to the prior period, you focus on a broader timeline—three, five, or even ten years—to capture the direction and speed of change. This perspective helps in forecasting, valuation models, net sales and risk assessments. Companies of different sizes all need assistance Identifying trends, researching variances, and correcting potential issues, all tasks that should be part of a complete financial statement analysis. For businesses in the e-commerce sector, understanding these analytical techniques is crucial.

• For instance, you can see that every year, advertising costs are equal to 10% of revenue (vertical), but in rupees, it has gone from ₹50,000 to ₹1,00,000 in five years (horizontal).
• On the balance sheet, comparing current assets as a percentage of total assets shows which company has greater liquidity.
• Vertical analysis is important because it provides a way to compare financial statements of different-sized companies or different periods within the same company.
• It enables informed decision-making, strategic planning, and resource allocation, empowering stakeholders to navigate the complexities of the business landscape with confidence and clarity.
• By being able to measure which cost areas of the business are rising (falling) as a proportion of sales, one can then look at the contributing factors in more detail.
• Once the historical data from 2021 has been inputted into Excel, we must determine the base figure to use.

Balance Sheet Horizontal Analysis

This brings out the proportionate relationship of each item within the financial statement. Vertical Analysis using Income Statements is a method where each line item is represented as a percentage of a base figure, typically total what is a vertical analysis revenue. Vertical Analysis using Income Statements provides insight into the operational efficiency of a company. This method allows for easy comparison across different periods or companies. Vertical Analysis using Income Statements can highlight trends in revenue, expenses, and profitability.

Vertical Analysis Formula

• In a case study, a company’s cash flow statement items are converted into percentages of total cash inflows or outflows.
• While the US market performance improved, it underperformed the other regions for the year.
• Viewing financial statement trends in percentages through vertical analysis rather than absolute amounts removes the impact of overall growth or decline.
• One-time events or extraordinary items can skew your vertical analysis results.

For instance, you can see that every year, advertising costs are equal to 10% of revenue (vertical), but in rupees, it has gone from ₹50,000 to ₹1,00,000 in five years (horizontal). He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. Learn how tools like Brixx help accounting firms work smarter, serve clients better, and stay ahead in a fast-changing industry. Vertical financial analysis goes hand in hand with horizontal financial analysis, and they have to be used together, but they serve different purposes. This analysis shows a consistent growth trend, indicating positive performance.

So by using this method, it is easy to understand the net profit as it is easy to compare between the years. We can easily understand that the total expenses gradually increased from 43% to 52%, and the net income get reduced from 1st year to QuickBooks ProAdvisor 2nd year. In the 3rd year, the COGS decreased compared to the previous years, and the income increased.

Horizontal vs. Vertical Analysis

Although common size analysis is not as detailed as trend analysis using ratios, it does provide a simple way for financial managers to analyze financial statements. Horizontal analysis, also known as trend analysis, involves comparing financial data across multiple periods to identify trends and growth patterns. Vertical analysis, on the other hand, involves analyzing financial statement items as a percentage of a base amount to understand the relative proportions of various components within a single period.