E.g. HGY Company’s income statement for the year ended 2016 is shown below along with the financial results for the year 2015. Benjamin Graham and David Dodd first published their influential book “Security Analysis” in 1934. A central premise of their book is that the market’s pricing mechanism for financial securities such as stocks and bonds is based upon faulty and irrational analytical processes performed by many market participants. This results in the market price of a security only occasionally coinciding with the intrinsic value around which the price tends to fluctuate. Investor Warren Buffett is a well-known supporter of Graham and Dodd’s philosophy. Here’s an example of an income statement from a fictional company for the year that ended on September 28, 2019.

On the other hand, in vertical financial analysis, an item of the financial statement is compared with the common item of the same accounting period. That’s exactly why it’s called horizontal analysis – you compare the data from each period side by side to calculate your results. In this article, you will learn about the horizontal analysis of financial statements and how to incorporate it into your company’s accounting practices. You will also learn how to do horizontal analysis using an income statement and a balance sheet. You can carry out the analysis of financial statements using many methods. Two popular methods that cover different needs are horizontal and vertical analysis. Vertical analysis, on the other hand, focuses on a specific period of time and studies the proportions of the total amount represented by the different variables for that period.

How Does Horizontal Analysis of Financial Statements Work?

This type of presentation makes it easier to spot declining margins and/or liquidity problems early and make corrections before they can become serious concerns. Financial statements should be prepared in a standard vertical format in accordance with accounting standards. The main use of vertical analysis is to calculate the financial ratios which in turn are key metrics in evaluating company performance. Once the ratios are calculated, they can be easily compared with ratios in similar companies for benchmarking purpose.

For example, if you run a comparative income statement for 2018 and 2019, horizontal analysis allows you to compare revenue totals for both years to see if it increased, decreased, or remained relatively stagnant. For instance, instead of creating a balance sheet or income statement for one specific period of time, you would also create a comparative income statement or balance sheet that covers quarterly or annual activity for your business. As a result, some companies maneuver the growth and profitability trends reported in their financial horizontal analysis report using a combination of methods to break down business segments.

Horizontal Analysis of Balance Sheets and Financial Statements

As a working professional, business owner, entrepreneur, or investor, knowing how to read and analyze data from an income statement—one of the most important financial documents that companies produce—is a critical skill to have. The starting and ending accounting periods can be defined by the user of this analysis at will. Therefore, showing favorable what is a horizontal analysis results from selective accounting periods is easy. Analysts can use trend analysis as a baseline to forecast the future performance indicators of a company. This type of analysis is useful in detecting anomalies in the financial statements of a company. It requires basic calculations and if there are any abnormalities, they can be detected easily.

• Within an income statement, you’ll find all revenue and expense accounts for a set period.
• Sometimes you may find horizontal analysis reports, saving you the calculations, but you can always calculate the percentage change yourself using publicly available financial data.
• It shows how certain numbers in a balance sheet, income statement, or cash flow statement have changed from one accounting cycle to another.
• DuPont analysis uses several financial ratios that multiplied together equal return on equity, a measure of how much income the firm earns divided by the amount of funds invested .
• Therefore, an investor can easily track a company’s earnings per share ratio, using this analysis balance sheet before making an investment decision.
• A company’s current ratio can be formulated by dividing the current assets by the current liabilities.
• Let us assume that we are provided with the income statement data of ABC Co.

Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. The overall growth has been relatively higher in the year 2018 compared to that of the year 2017. Nevertheless, it indicates that the company has witnessed continuous growth in the last two years. Fortunately, tools like Google Sheets or Excel allow you to set up templates, so you can forget about the calculations and focus on analysis. Using Layer, you can also automate data flows and user management, so you can gather the data automatically, carry out the analysis, and automatically share results and reports with the right users. The analysis assumes that everything outside will more or less stay the same.