Horizontal Analysis & Vertical Analysis

Horizontal Analysis:

1. Time Comparison: Horizontal analysis compares financial data across different

periods, like comparing this year's sales with last year's.

2. Identifying Trends: It helps to identify trends or patterns in financial performance

over time.

3. Absolute Change: It focuses on absolute changes in values, like how much sales
increased or decreased from one period to another.

4. Example: If a company's sales were $100,000 last year and $120,000 this year,
horizontal analysis would show a $20,000 increase over the year.

Vertical Analysis:

1. Component Comparison: Vertical analysis compares different components of

financial statements within the same period, like comparing each expense item to total
revenue.

2. Percentage Comparison: It expresses each component as a percentage of a base item,

typically total revenue or total assets.

3. Understanding Proportions: It helps in understanding the proportion of each

component relative to the whole.

4. Example: If a company's total revenue is $500,000 and marketing expenses are

$50,000, vertical analysis would show that marketing expenses represent 10% of total
revenue.

Key Differences:

1. Focus: Horizontal analysis focuses on changes over time, while vertical analysis
focuses on the composition of financial statements within a single period.

2. Comparison Method: Horizontal analysis compares absolute values, while vertical

analysis compares components as percentages of a base item.

3. Purpose: Horizontal analysis helps identify trends and performance changes, while
vertical analysis helps understand the composition and proportionality of financial
components.

In simple terms, horizontal analysis looks at how things change over time, while
vertical analysis compares different parts of something at the same time.