Horizontal Analysis: What It Is vs Vertical Analysis

In this scenario, revenue serves as the fundamental component, and the percentages will unveil the proportion of revenue generated by each specific item. Common size analysis is also an excellent tool to compare companies of different sizes but in the same industry. Looking at their financial data can reveal their strategy and their largest expenses that give them a competitive edge over other comparable companies.

Vertical analysis offers a unique lens to view and interpret financial statements, focusing on relative proportions rather than absolute numbers. For CFOs and CEOs, understanding and utilizing vertical analysis can provide valuable insights for strategic decision-making, investor communication, and competitive benchmarking. Vertical analysis provides insights into the composition of your financial statements and their relationship with the base amount.

First, a direction comparison simply looks at the results from one period and comparing it to another. For example, the total company-wide revenue last quarter might have been $75 million, while the total company-wide revenue this quarter might be $85 million. This type of comparison is most often used to spot high-level, easily identifiable differences. You can choose whatever interval (month-over-month, year-over-year, etc.), but each iterative financial statement should be equal distance away regarding when it was issued compared to other bits of financial information.

Vertical Analysis Formula

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. Notice that the column presenting the ratio of each line item to gross sales is to the right of the actual values. Sometimes, financial statements are prepared in this way by the provider but often FP&A analysts will utilize their own basis depending on what information they are trying to understand. Horizontal analysis differs slightly from vertical analysis in that it presents each item in the financial statements as a percentage of itself at an earlier period in time. A vertical analysis, also known as common-size analysis, is a method of financial statement analysis that shows each line item as a percentage of a base figure within the statement.

Common Size Analysis of Financial Statements

We already established that vertical analysis looks at the proportional representation of specific line items on financial statements by comparing them as a percentage of the total. Here, the Total Revenue is considered 100%, and all other figures are expressed as a percentage of this total. This vertical analysis shows that the company’s Cost of Goods Sold is 40% of the total revenue, leaving a gross profit margin of 60%. Operating expenses account for 25% of the total revenue, resulting in an operating income of 35%. After accounting for interest and taxes, the net income is 21% of the total revenue, providing a clear picture of the company’s profitability.

Criticism of Horizontal Analysis

1. Looking at their financial data can reveal their strategy and their largest expenses that give them a competitive edge over other comparable companies.
2. Using tools such as Power BI to chart your results, you can visualize your performance and make informed decisions for a successful plan.
3. This consistency is beneficial when comparing a company’s financials over multiple periods or against other companies, irrespective of their size.
4. The analysis helps to understand the impact of each item in the financial statements and its contribution to the resulting figure.
5. In this example, the business’s variable expenses have trended downward over the three-year period.
6. Vertical analysis is the critical tool in FP&A that provides valuable insights into the relative importance of different items within the financial statements and their impact on overall performance.

Utilizing tools in conjunction with vertical common size analysis significantly helps with financial reporting. It enables businesses to gain quick insights into historical performance by comparing current values to previous periods. Vertical analysis is a useful tool for financial statement analysis and helps businesses gain insight into their financial position and performance. However, it has certain limitations that should be taken into account when relying on its output. Vertical analysis is an accounting tool that enables proportional analysis of documents, such as financial statements. While performing a vertical analysis, every line item on a financial statement is entered as a percentage of another item.

In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. Datarails’ AI FP&A software replaces spreadsheets with real-time data and integrates fragmented workbooks and data sources into one centralized location.

When comparing a company’s vertical analysis results with industry averages vertical analysis is also known as or key competitors, it becomes easier to spot areas of inefficiency or potential competitive advantages. Input the percentage against the line items calculated to see a concise view of each item’s contribution to the gross amount. Creating visually appealing charts such as bar graphs or data tables will make it easier to understand. You simply receive a concise view of your line items without performing complex calculations. Using tools such as Power BI to chart your results, you can visualize your performance and make informed decisions for a successful plan. This financial analysis can help you build a solid financial report by comparing the percentages to the budgeted expectations.

1. This type of comparison is most often used to spot high-level, easily identifiable differences.
2. Further, when working with large data sets, we recommend cleaning up the data to improve the overall visual representation of the analysis.
3. Input the percentage against the line items calculated to see a concise view of each item’s contribution to the gross amount.
4. Vertical analysis is used in order to gain a picture of whether performance metrics are improving or deteriorating.
5. Therefore, horizontal analysis looks at changes over time based on different data from the financial statements.
6. Once the historical data from 2021 has been inputted into Excel, we must determine the base figure to use.

Cash, for instance, makes up 15% of total assets, while equipment represents a significant 40%. Similarly, total liabilities are 40% of total assets, with long-term debt making up 30%. This vertical analysis provides insights into the company’s financial structure and the proportion of financing coming from debt versus equity. So, in a vertical analysis of a balance sheet, every line item — cash, accounts receivable, fixed assets, accounts payable, stockholders equity, etc. — is shown as a percentage of total assets. In a vertical analysis of an income statement, every line item is shown as a percentage of gross sales. Vertical analysis is a method where each line item on a financial statement is represented as a percentage of a base figure.

The analysis of critical measures of business performance, such as profit margins, inventory turnover, and return on equity, can detect emerging problems and strengths. For example, earnings per share (EPS) may have been rising because the cost of goods sold (COGS) has been falling or because sales have been growing steadily. By doing both of these analyses, you can get an idea of how line items compare to themselves over time and whether those changes make sense in the context of the current time period as well.