Financial Analysis

LECTURE NOTES
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Horizontal Analysis

● This is the comparison of figures shown in the financial statement of two or more
consecutive periods.

● The difference between the figures of the two periods is calculated and the
percentage change from one period to the next is computed using the earlier period
as the base.

● The difference could either be an increase or a decrease both in amount and in

percentage.

❖ Horizontal analysis is used in the review of a company's financial statements over

multiple periods. It is usually depicted as a percentage growth over the same line
item in the base year. Horizontal analysis allows financial statement users to easily
spot trends and growth patterns.

❖ You compare like accounts to each other over periods of time.

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Vertical Analysis of Financial Statements

● It is a technique in which the relationship between items in the same financial statement is

identified by expressing all amounts as a percentage of a total amount.

● This method compares different items to a single item in the same accounting period.

● The financial statements prepared by using this technique are known as common size

financial statements.

● This analysis is performed on the income statement as well as the balance sheet.

● With vertical analysis, comparisons become more meaningful particularly when we

are analyzing financial statements of different companies.

● Vertical analysis makes it easier to understand the correlation between single items on a
balance sheet and the bottom line, expressed in a percentage.

● Vertical analysis can become a more potent tool when used in conjunction with horizontal
analysis, which considers the finances of a certain period of time.