What is the difference between vertical analysis and horizontal analysis?

The Vertical Analysis income statement Fig reveals what portion of sales has been absorbed by various costs, and expenses incurred and the percentage of the total sales that remains as net income. For example, the table shows that 60 percent of total sales are incurred as cost of goods sold and only 13.54 percentage of total sales are in the form of net income to the firm. Notice that the column presenting the ratio of each line item to gross sales is to the right of the actual values. Sometimes, financial statements are prepared in this way by the provider but often FP&A analysts will utilize their own basis depending on what information they are trying to understand. The two examples below show how to do horizontal analysis using Google Sheets, but you can easily do the same in Excel.

Using Excel or Google Sheets is a great way to carry out a horizontal analysis of financial statements, especially if you use a pre-made template. If you use Layer, you can even automate parts of this process, including the control of data flows, calculations, and sharing the results. 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.

ways to analyze an income statement

In Horizontal Financial Analysis, the comparison is made between an item of financial statement, with that of the base year’s corresponding item. 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. Horizontal analysis is an approach used to analyze financial statements by comparing specific financial information for a certain accounting period with information from other periods. Horizontal analysis can help you identify trends in your data using your financial statements.

• As the name suggests, trend analysis involves identifying trends and predicting outcomes, which requires analyzing data from multiple consecutive periods.
• Horizontal allows you to detect growth patterns, cyclicality, etc., and to compare these factors among different companies.
• Datarails’ FP&A solution replaces spreadsheets with real-time data and integrates fragmented workbooks and data sources into one centralized location.
• You can also choose to calculate income statement ratios such as gross margin and profit margin.
• However, in the case of the income statement, the same may be indicated as a percentage of gross sales, while in cash flow statement, the cash inflows and outflows are denoted as a proportion of total cash inflow.
• The generation of long-term, sustainable profits is a function of possessing an “economic moat”, which, to reiterate, is context-specific because no two industries are identical .

The base may also be net income or total gross income for an income statement. On a balance sheet this might mean showing a percentage of either total assets, liabilities, or equity. Horizontal analysis looks at trends over time on various financial statement line items. For example, a business may compare sales from their current year to sales from the prior year. The trending of items on these financial statements can give a business valuable information on overall performance and specific areas for improvement. It is most valuable to do horizontal analysis for information over multiple periods to see how change is occurring for each line item. If multiple periods are not used, it can be difficult to identify a trend.

Horizontal Analysis: Should You Be Using It in Your Business?

Looking at and comparing the financial performance of your business from period to period can help you spot positive trends, such as an increase in sales, as well as red flags that need to be addressed. Horizontal analysis uses a line-by-line comparison to compare the totals. For example, if you run a comparative income statement for 2018 and 2019, https://www.wave-accounting.net/ horizontal analysis allows you to compare revenue totals for both years to see if it increased, decreased, or remained relatively stagnant. Vertical analysis, also called common-size analysis, focuses on the relative size of different line items so that you can easily compare the income statements and balance sheets of different sized companies.

The vertical analysis of the balance sheet will result in a common-size balance sheet. The percentages on a common-size balance sheet allow you to compare a small company’s balance sheets to that of a very large company’s balance sheet.

How Is Horizontal Analysis Performed?

Calculating this involves subtracting the base period’s value from the comparison period‘s value, dividing the result by the base period’s value, then multiplying by 100. In this first example, I will do a vertical analysis of Company A’s revenue based on its annual income statement. In addition to the data for your company, collect the same data for similar companies in your industry.

Now, it’s time for the most important step – analyzing and interpreting the results for the period. The interpretation of these results is likely to be more accurate if you can compare them to previous results, as well as those Horizontal And Vertical Analysis of your competitors. See how to do a horizontal analysis and a detailed horizontal analysis example. E.g. HGY Company’s income statement for the year ended 2016 is shown below along with the financial results for the year 2015.