Horizontal and Vertical

Analysis
Financial Statement Analysis
 Financial statement analysis (or financial analysis) is the process
of reviewing and analysing a company's financial statements to
make better economic decisions
 Tools of financial statement analysis
 Horizontal analysis
 Vertical analysis
 Ratio analysis
 Graphical analysis
 Regression analysis
Horizontal Analysis
 Horizontal analysis also known as trend analysis is an analysis of the
year-to year change in each financial statement item
 Horizontal analysis (or trend analysis) refers to studying the behaviour of
individual financial statement items over several accounting periods
Purpose of Horizontal Analysis
 The purpose of horizontal analysis is to determine how each item
changed, why it changed, and whether the change is favourable or
unfavourable
 It’s a way for analysts to compare accounts or performance metrics
over time to see if the company is improving or declining
Vertical Analysis
 Vertical analysis concentrates on the relationships between various financial
items on a financial statement
 To show this relationship each item on the statement is expressed as a
percentage of a base item that also appears on the statement. On the
balance sheet, each item is expressed as a percentage of total assets. On
the income statement, each item is stated as a percentage of sales
Purpose of Vertical Analysis

 To gain insight into the relative importance or magnitude of various

items on the financial statements
 Vertical analysis is applicable for internal performance review as
well as for comparison to peers and bench-marking
 Comparisons allows management and accounting staff at the
company to isolate the reasons and take action to fix the problem
Difference between Vertical and
Horizontal analysis
 Under horizontal analysis an analyst compares the financial statement of
the company for two more accounting periods, it can be used on any item
in the financial statement company
 Vertical analysis is done to review and analysis the financial statements
for a year only and therefore it is also called static analysis. Under this
method each entry for assets, liabilities and equities in a balance sheet is
represented as a percentage of the total account
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