Financial Analysis: Horizontal Analysis Example

Financial statement analysis is a process whereby investors and creditors evaluate the financial health of a business. It’s also used by internal decision makers like owners and managers. We will look in detail at ways to analyze a set of financial statements to gain new perspectives on the performance and financial health of a company. There are three general tools or techniques used to complete financial statement analysis: Horizontal Analysis, Vertical Analysis and Ratio Analysis. These techniques should be used together to aid in the evaluation of the financial health of a business. The focus of this video will be horizontal analysis. Horizontal analysis, which is sometimes called trend analysis, is a technique for evaluating a series of financial data over a period of time. Its purpose is to determine the increase or decrease of an account over time.

We do this by determining the percentage change from one year to the next. I solve percentage changes by using the very complicated math formula: new minus old divided by old. Let’s look at an example. Our new sales are \$110,000. The old sales are \$100,000. So new – old is an increase of \$10,000. I divide that by the old amount of \$100,000 to see that sales increased 10%. Here is a more comprehensive example of Apu’s Quick-E-Mart, Current Asset section of the Balance Sheet. You can see that current assets increased quite a bit, mainly due to Cash and Inventory increases. Horizontal analysis can be even more useful when data from a number of years are used to compute trend percentages. Trend analysis helps us analyze changes in financial information over a number of years. These changes are normally presented as percentages. The formula for trend analysis is current year amount divided by base year amount X 100% But you can also do new – old / old plus 1. The “old” amount is always the base year. Here is an example of trend analysis. In this case, 2013 is the base year.

So all of the increases in 2014, 2015 and 2016, relate back to the base year of 2013. relate back to the base year of 2013..