It means that elements of financial statements, such as liabilities, assets, or expenses, may change between different accounting periods, leading to variation when account balances for each accounting period are sequentially compared. Horizontal Analysis measures a company’s operating performance by comparing its reported financial statements, i.e. the income statement and balance sheet, to the financial results filed in a base period. In this article, you will learn about the horizontal analysis of financial statements and how to incorporate it into your company’s accounting practices.
To conduct a horizontal analysis of Goldman Sachs’ 2021 performance compared to 2020, first subtract the line items for the base year of 2020 from those for the target year of 2021. Then, divide the change by the base year amount and multiply by 100 to get the percentage change. Below are the results for the balance sheet and income statement, followed by an interpretation of the results. Since, any line item in a financial statement or financial ratio can be compared across a period of time, it makes the horizontal analysis extremely useful for anyone trying to track a company’s performance over time. The horizontal analysis evaluates trends Year over Year or Quarter over Quarter .
Horizontal Analysis: What It Is vs. Vertical Analysis
Horizontal analysis of income statements also produces worthwhile information. This increase in capital expenditures is also reflected on the liability side of the balance sheet.
An investor can see if a business is expanding and becoming more valuable or becoming less efficient and less valuable. For example, an investor can use the horizontal analysis of the balance sheet to track the earnings per share ratio on a company what is a horizontal analysis he is thinking about investing in. If the ratio continues to grow year over year, the investor’s analysis would show a positive trend and he would probably choose to invest in the company granted other metrics are equally as positive.
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The amounts from three years earlier are presented as 100% or simply 100. This type of analysis reveals trends in line items such as cost of goods sold. Horizontal analysis allows investors and analysts to see what has been driving a company’s financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. An analysis of the income statement, balance sheet, and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company’s performance and whether it is operating efficiently and profitably.
- So, common size financial statement not only helps in intra-firm comparison but also in inter-firm comparison.
- Nevertheless, it indicates that the company has witnessed continuous growth in the last two years.
- Calculate the percentage change by first dividing the dollar change between the comparison year and the base year by the line item value in the base year, then multiplying the quotient by 100.
- One of the major criticisms of horizontal analysis is that it can at times produce biased results.
- In addition, the use of horizontal analysis makes it easier to project trends into the future.
- For example, if your industry is seasonal, comparing consecutive quarters would provide misleading results.