What is the main difference between horizontal and vertical analysis? Horizontal analysis refers to comparison of an item of the financial statement of one period to its corresponding item of the base accounting period. Vertical analysis refers to the comparison of items of the financial statement to the common item of the same accounting period.
Financial statements help the business owner determine whether he or she is making profit or loss during the financial year. Financial analysis is the process of evaluating the information from the financial statements.
Horizontal and vertical analysis are the main types of financial analysis. You might be someone who use these terms interchangeably since they may sound similar. This post explains the differences between vertical and horizontal analysis.
Difference between Horizontal and Vertical Analysis with Table
|Basic Terms||Horizontal Analysis||Vertical Analysis|
|Definition||Compares financial data over multiple periods to identify trends and changes.||Compares individual line items within a single period to assess their relative proportions.|
|Timeframe||Compares data across different time periods (e.g., years or quarters).||Focuses on a single period’s financial statements, often a single year.|
|Purpose||Highlights trends and changes in key financial metrics (e.g., revenues, expenses, profits).||Emphasizes the composition of various elements as a percentage of a total.|
|Example||Comparing a company’s revenue in 2022 to its revenue in 2021.||Assessing the percentage of cost of goods sold (COGS) in total expenses.|
|Calculation Method||Typically involves calculating percentage changes from one period to another.||Involves determining the percentage relationship of each line item to a total (e.g., revenue or total assets).|
|Focus||Focuses on changes or trends in financial metrics as they evolve over time||Focuses on the relative importance of different components within a single period’s financial statements.|
|Decision-Making Use||Helps identify patterns and trends that inform strategic decisions.||Useful for assessing the structure of a company’s financial statements and its cost and revenue composition.|
|Flexibility||Allows for a broader assessment of financial performance over time.||Provides a detailed breakdown of the components of a single period’s data.|
|Comparative Nature||Compares financial data over different periods to one another.||Examines the proportionality of each line item within a single period.|
What Is Horizontal Analysis?
Horizontal analysis is a financial analysis technique that compares financial data or performance indicators from one period to another, typically from one year to the next, to identify trends, changes, or shifts in a company’s financial performance.
It helps assess the growth or decline of specific line items over time. Examples of Horizontal Analysis:
Revenue Growth: If a company’s revenue was $1 million in 2021 and $1.2 million in 2022, the horizontal analysis would show a 20% increase in revenue.
Expense Changes: Comparing operating expenses between two years, such as salaries and utilities, to see if there were significant increases or decreases.
Net Profit Trends: Analyzing the net profit from year to year to determine if it’s increasing, decreasing, or remaining stable.
Asset Changes: Assessing changes in total assets, like comparing total assets in 2021 to those in 2022 to understand the company’s asset growth or reduction.
Market Share: Evaluating a company’s market share by comparing sales volume with industry data over several years.
Horizontal analysis helps stakeholders understand how a company’s financial performance is evolving over time and can inform strategic decisions and financial planning.
What Is Vertical Analysis?
Vertical analysis, also known as common-size analysis, is a financial analysis technique that assesses the relative proportions of individual line items or components within a single period’s financial statements.
It expresses each line item as a percentage of a key total, typically the total revenue or total assets, to help understand the composition and structure of a company’s financial statements.
Examples of Vertical Analysis:
Income Statement: Expressing each expense item (like cost of goods sold or operating expenses) as a percentage of total revenue to understand their relative impact on profitability.
Balance Sheet: Calculating the percentage of each asset item (like cash, accounts receivable, or inventory) in relation to total assets to analyze the asset composition.
Profit Margin Analysis: Evaluating the percentage of net income in comparison to total revenue to assess the company’s profit margin.
Expense Ratios: Expressing each operating expense item (e.g., rent, utilities, salaries) as a percentage of total expenses to identify cost structures.
Liquidity Analysis: Calculating the percentage of current assets (e.g., cash, accounts receivable) in relation to total assets to gauge liquidity.
Vertical analysis provides insights into the relative significance of various financial components within a single period’s financial statements, aiding in comparisons and decision-making.
It helps stakeholders understand the distribution of resources and expenses within a company’s financial structure.
Main Difference between Horizontal and Vertical Analysis
- Horizontal Analysis involves comparing financial items across different time periods in comparative financial statements to track overall trends and performance. In contrast, Vertical Analysis is a tool for studying financial statements by comparing each item to a base figure within the same statement, like assets, liabilities, sales, or equity.
- Horizontal Analysis helps assess a company’s performance or financial status over time compared to previous periods. Vertical Analysis, on the other hand, shows how each line item relates to the total in the current financial year.
- The main goal of Horizontal Analysis is to monitor how individual items in financial statements change over years. Conversely, Vertical Analysis aims to reveal the relative importance or proportion of various items in a specific year’s financial statement.
- In Horizontal Analysis, you compare current-year items with those of a base year in both absolute and percentage terms. In Vertical Analysis, you compare each item in the financial statement with other items within the same statement.
- Horizontal Analysis is useful for comparing one year’s financial results to another. Vertical Analysis, on the other hand, is employed to compare one company’s financial statement to another within the same industry, and it can also be used for benchmarking purposes.
Similarities between Horizontal and Vertical Analysis
- Both can help identify trends and patterns in financial data.
- Both are techniques used for analyzing financial statements.
- Both involve comparing financial data to draw insights.
- Both aid in decision-making and financial assessment.
- Both may involve percentage comparisons of financial line items.
- Both are tools to assess a company’s financial performance.
- Both methods use base figures for comparison.
- Both can highlight changes in financial data over time or within a single period.
- Both provide information to stakeholders about financial statement details.
- Both can be employed for benchmarking against industry standards or competitors.
Horizontal and vertical analysis are distinct tools in accounting, each with its purpose and focus. Horizontal analysis primarily tracks changes in financial items over multiple time periods, helping assess a company’s performance over time and identify trends. It’s valuable for comparing year-to-year data and evaluating growth or decline.
Vertical analysis delves into the composition of a single financial statement, expressing each item as a percentage of a base figure (like total revenue or assets). It reveals the relative importance of individual line items within a specific period’s financial statement.
While horizontal analysis emphasizes trends and changes across years, vertical analysis emphasizes the proportions and structures within a single financial statement.
Both techniques provide valuable insights for financial decision-making, but they serve different analytical purposes, helping stakeholders understand a company’s financial health from various angles.
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