The terms horizontal and vertical analysis are parts of financial analysis performed by business professionals to assess the business’s or assignment’s profitability, viability, and feasibility.
Key Takeaways
- The horizontal analysis compares financial statement items across multiple periods to identify trends and performance changes.
- Vertical analysis expresses each line item as a percentage of a base figure within the same period, facilitating comparisons between companies or industry benchmarks.
- Horizontal analysis helps assess a company’s progress over time, while vertical analysis provides insights into the composition and efficiency of a company’s financial structure.
Horizontal vs Vertical Analysis
The difference between horizontal and vertical analysis is that the former considers the total amount as a percentage in the financial statement over many consecutive years. The latter discusses each amount separately in the financial information as a percentage for another amount.
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The horizontal or “trend analysis” considers all the amounts in financial statements over many years.
The vertical analysis considers each amount on the financial statement listed as a percentage of another amount.
Comparison Table
| Parameters of Comparison | Horizontal Analysis | Vertical Analysis |
|---|---|---|
| Definition | It takes into account all the amounts in financial statements over many years and considers it the percentage of the total. | It considers the amounts in the financial statements separately as a percentage of the total. |
| Goal | The goal is to assess the trends related to specific items over the past many years. | Here, the goal is to assess the trend of a specific item with an everyday item within the current year. |
| Purpose | By comparing trends, the analysis helps a business understand the growth of an item in terms of financial factors. | It helps show the relative sizes of the accounts in the financial statement. |
| Formula | Horizontal analysis percentage = [(Amount in Comparison Year – Amount in Base Year) / Amount in Base Year] * 100 | Vertical analysis percentage = (Statement line item / Total base figure) * 100 |
| Period | It takes into account multiple years, such as a decade. | It is only concerned with items presented within the current fiscal year. |
| Firm, wise comparison | Horizontal analysis can only be used when considering an intra-firm wise comparison. | Vertical analysis is used when talking about both inter-firm and intra-firm. |
What is Horizontal Analysis?
Finance professionals conduct horizontal analysis within a company or business to help evaluate the trend of an item over the past many consecutive years.
Here, multiple periods of financial statements are used to evaluate horizontal analysis. It means that the report helps show the change in amounts of information over a period instead of the current year.
The rise and fall of a trend concerning an item are recorded, and based on that, a plan of action is taken to decide how to help the thing grow in popularity and grab the company’s interest.
There is a formula that can be primarily used to find out horizontal analysis –
- Horizontal Analysis (absolute) = Amount in Comparison Year – Amount in Base Year
- Horizontal analysis percentage = [(Amount in Comparison Year – Amount in Base Year) / Amount in Base Year] * 100
What is Vertical Analysis?
Financial professionals conduct vertical analysis to make gathering and assessment of data more manageable by using percentages to perform business analytics and comparison.
It helps show the relative sizes of the accounts in the financial statement. This can also help compare the companies within the industry with those performing the vertical analysis.
The above is done on balance sheets, retained earnings statements, fixed assets and income statements, and each line within these is considered separately as a percentage of the complete information.
There is a formula for determining the absolute vertical analysis and percentage –
- Vertical analysis percentage = (Statement line item / Total base figure) * 100
- Vertical Analysis Formula (Income Statement) = Income Statement Item / Total Sales * 100
- Vertical Analysis Formula (Balance Sheet) = Balance Sheet Item / Total Assets (Liabilities) * 100
Main Differences Between Horizontal and Vertical Analysis
- Horizontal analysis can only be used when considering an intra-firm wise comparison, while vertical analysis is used when discussing inter-firm and intra-firm.
- The horizontal analysis considers multiple periods or years, such as a decade. And vertical research is concerned with items presented within the current fiscal year.
- https://www.unf.edu/~ggundlac/pdfs/pub_18.pdf
- https://pubs.geoscienceworld.org/ssa/bssa/article/95/5/1779/103169
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
