What is financial statement analysis?

Financial statement analysis is an important business practice

that companies use to track financial data and make predictions
and comparisons.

Analyzing these statements can provide insights into potential

problems and opportunities, and it can also help a company
develop financial strategies and prepare for the next quarter or
year. Therefore, financial analysis can contribute heavily to a
company's overall success.

What is horizontal analysis?

In horizontal analysis, also known as trend analysis or time
series analysis, financial analysts look at financial trends over
periods of time—especially quarters or years.

Typically, financial analysts perform horizontal analysis before

vertical analysis, and it is usually the most useful for companies
that have been operating for a long period of time.

In horizontal analysis, you can compare figures from one time

period to figures from a base time period to get an overview of
changes over time.

Analyzing financial trends over periods or years can help you

track how a company's financial state has changed, find
patterns in its data and spot potential problems and
opportunities.

For example, you could use horizontal analysis to compare a

company's profit margins in one year to its profit margins in
another year.
How to perform horizontal analysis
Gather financial statements.

Compare the statements.

Identify patterns and trends in the data.

Examples of horizontal analysis

Balance sheet
Imagine that you want to compare a company's balance sheet from
this year to the balance sheet from the year before. Last year is your
base year, and let's say the company's total assets were $600,000.
Income statement
Dividing the difference ($100,000) by the base year's amount
($400,000) equals 0.25. This means that the company's net income
increased by 25% from last year to this year.

What is vertical analysis?

Vertical analysis, which is also known as common-size analysis,
is similar to horizontal analysis and can be performed on the
same financial documents. However, financial analysts perform
vertical analysis vertically inside of a column rather than
horizontally across time periods.