Lecture- 5

Trend and Vertical analysis

ACC 306

Financial Statements Analysis

Dr. ARPIT SIDHU

(Ph.D, UGC-NET, HP-SET, MBA,
MCOM, BCOM, Dip-ecomm)
Learning Outcomes:
• Analyze and Interpret the
Financial Position and
Performance of Companies
through Vertical Analysis
NEWS ANALYSIS
Revision
The process of explaining the meaning, significance and relationship between
two financial factors is called _________?
a) Summarization
b) Analysis
c) Interpretation
d) None
C
Trend analysis

Compare Across Periods

Include more than three
years of data and supports to
build prediction model and
forecasts financial
statements. Financial
Elements can show upward,
downward and Sideway
(Horizontal trend)
Cont.
• Trend analysis, compares key financial statement values or relationships for
the same company over a period of years.
• This analysis sets the base year at a value of 100% and then shows
subsequent years in relation to increases or decreases over the base year.
• Horizontal or trend analysis helps the analyst examine relationships to detect
strengths and weaknesses, such as a faster growth in cost of sales compared
to sales, as shown in the example ahead.
• The purpose of horizontal analysis is primarily to direct attention to the
accounts that require further investigation.
Cont…..
Formula of Calculating Trend percentages:
Current year figure
Base Year figure
100
Trend Analysis of HUL (Balance Sheet)
Trend Analysis of HUL (Balance Sheet)
Trend Analysis of HUL (Balance Sheet)
Trend Analysis of HUL (P&L)
Vertical analysis
It is a method of financial statement analysis in which
each line item is listed as a percentage of a base figure
within the statement.
 Common Size Analysis - Vertical

In vertical common-size statements, a base amount (generally

total assets on the balance sheet and net sales on the income
statement) will be valued at 100%,
and the elements within
that statement are
expressed as a
percentage of the total
Common Size Statements
It recast all items in a particular financial statement as a % of a selected (usually
the largest and most important) item on the statement for f/s analysis.

These can be used in several ways:

To compare elements in a single year’s financial statements
To analyze trends across a number of years for one business
To compare businesses of differing sizes within an industry (such as Wal-Mart
to Target)
To compare the company’s performance and position with an industry
average
Exp of vertical common size balance sheet
Exp of vertical common size income
statement
 Vertical (Common-Size) Analysis
• Purpose is to answer the general question, What percentage of one line item is another line item?

• Vertical analysis is useful for analyzing the balance sheet

• Called common size because it converts every line item to a percentage, thus allowing comparisons
between the financial accounts of the organizations of different sizes.

𝑳𝒊𝒏𝒆 𝒊𝒕𝒆𝒎 𝒐𝒇 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕

Vertical analysis = 𝐗𝟏𝟎𝟎
𝑩𝒂𝒔𝒆 𝒍𝒊𝒏𝒆 𝒊𝒕𝒆𝒎
The following procedure may be adopted for
preparing the common size statements:
• 1. List out absolute figures in rupees at two points of time, say year 1,
and year 2 (Column 2 & 4).
• 2. Choose a common base (as 100). For example, revenue from
operations may be taken as base (100) in case of statement of profit and
loss and total assets or total liabilities (100) in case of balance sheet.
• 3. For all items of Col. 2 and 3 work out the percentage of that total. Column
4 and 5 shows these percentages
Vertical Analysis

The management of HUL Company asks you to

prepare a vertical analysis for the comparative
balance sheets of the company.

21
Vertical Analysis of Financial Position of HUL

Comment on—

• Shareholder’s
Funds
• Long term debt
• Current
Liabilities
• Trade payables.

23-Feb-23 22
Vertical Analysis of Financial Position of HUL

Comment on—

• Shareholder’s
Funds
• Long term debt
• Current
Liabilities
• Trade payables.

=(216/19602)*
100

=(216/17855)*
100
23-Feb-23 23
Vertical Analysis of Financial Position of HUL
Comment on—

• Fixed Assets
• Non Current
Investments
• Current Assets
• Inventories
• Trade receivables
• Cash and Cash
Equivalents

23-Feb-23 24
Vertical Analysis of Financial Position of HUL
Comment on—

• Fixed Assets
• Non Current
Investments
• Current Assets
• Inventories
• Trade receivables
• Cash and Cash
Equivalents

23-Feb-23 25
Vertical Analysis of Financial Performance of HUL

Comment on—

• Total Expenses
• Cost of Raw
material
consumed
• Employee cost
• Finance Cost
• Depreciation
• PBT
• PAT
• Overall
profitability
position of HUL

23-Feb-23 26