Horizontal Analysis vs Vertical Analysis What’s the Difference?

© 2025 Anamma – Financial strategies, investment tips, and market analysis to help you achieve financial independence and multiply your wealth. Thomas Richard Suozzi (born August 31, 1962) is an accomplished U.S. politician and certified public accountant with extensive experience in public service and financial management. She has held multiple finance and banking classes for business schools and communities. While this may sound confusing, it’s simply another way of looking at company performance. One of the most important tasks in financial accounting is accurate reporting.

C. Practical Example: Income Statement and Balance Sheet

All of the amounts on the balance sheets and the income statements will be expressed as a percentage of the base year amounts. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. If the previous year’s amount was twice the amount of the base year, it will be presented as 200.

Percentages are worked on the basis of a selected base year and then compared. On the other hand, vertical analysis provides a close-up of financial statement results and the relationship to a specific benchmark. The single biggest difference between horizontal and vertical analysis is the focus. In this analysis, the very first year is considered as the base year and the entities on the statement for the subsequent period are compared with those of the entities on the statement of the base period.

• The company will need to further examine this difference before deciding on a course of action.
• 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 2 million increase in turnover is a positive indication in terms of performance with a 50% increase from the year 2014.
• It is important for businesses to understand the attributes and benefits of each analysis method and choose the most appropriate approach based on their specific needs and objectives.

Main Differences Between Horizontal and Vertical Analysis

It also shows how a vertical analysis can be very effective in understanding key trends over time. This percentage can be used to compare bothbalance sheetandincome statementperformance within the company. Much like ratio analysis, vertical analysis allows financial information of a small company to be compared with that of a large company.

Similarities Between Horizontal And Vertical Analysis

It helps identifying growth trends as well as can indicate how efficiently the business is managing its expenses over the years. It can be manipulated by keeping a very weak performance year as the base year, making performance of other comparison years look more attractive than they actually are. Depending on their expectations, Mistborn Trading could make decisions to alter operations to produce expected outcomes. For example, MT saw a 50% accounts receivable increase from the prior year to the current year.

What role does horizontal and vertical analysis play in business financial assessments?

The amounts from past financial statements will be restated to be a percentage of the amounts from a base year. These analytical approaches create frameworks for understanding financial situations. By employing both horizontal and vertical analyses, businesses gain robust tools for financial navigation and decision-making. Companies of different sizes all need assistance Identifying trends, researching variances, and correcting potential issues, all tasks that should be part of a complete financial statement analysis. Comparative financial statements reflect the profitability and financial status of the concern for various accounting years in a comparative manner.

Comparing Vertical Analysis and Horizontal Analysis

So, we can say that vertical analysis is a good tool to know what is happening in the financial statements. But, it can’t really answer “Why.” Like, in the above example we know cost is a major reason for the drop in the profits. But, we can’t be sure if the costs have actually risen, or the management has cut the prices of the product. Typical asset accounts include inventory, accounts receivable, investments, fixed assets and intangible assets.

Limitations of Horizontal Analysis

Horizontal analysis and vertical analysis are two common methods used in financial statement analysis. Horizontal analysis involves comparing financial data over a period of time, typically multiple years, to identify trends and changes in performance. It helps to assess the growth or decline of specific line items such as revenue, expenses, or net income. On the other hand, vertical analysis involves comparing different line items within a single period, typically a single year, to determine their relative proportions and significance. It helps to understand the composition of financial statements by expressing each line item as a percentage of horizontal vs vertical analysis a base figure, such as total revenue or total assets.

It should be kept in mind that the data of two or more financial years can be compared only when the accounting principles are the same for the respective years. So, for example, when analyzing an income statement, the first line item, sales, will be established as the base value (100%), and all other account balances below it will be expressed as a percentage of that number. An important consideration when applying this formula is that both measures must be from the same period. For example, you could find labor expenses for the current financial year as a percentage of total revenue for the current financial year. However, it would make no sense to find labor expenses for the current financial year as a percentage of total revenue for December this year. Yet Schneider has a higher overall net income due to much greater gains on the sale of investments.

• But, it can’t really answer “Why.” Like, in the above example we know cost is a major reason for the drop in the profits.
• Investors and analysts can use this information to gauge the financial risk and stability of a company.
• Horizontal and vertical analysis are two types of analysis you can do that use simple mathematical formulas.
• For example, if the base amount is gross sales of $50,000, and the analysis amount is selling expenses of $5000.
• They, together, are key to understanding the financial position of a business entity.
• Horizontal analysis is used to indicate changes in financial performance between two comparable financial quarters including quarters, months or years.

Though each has its advantages, when used together, horizontal and vertical analysis offers a comprehensive picture of a company’s financial health by spotting trends and patterns that have occurred over a specific period. In this analysis, the line of items is compared in comparative financial statements or ratios over the reporting periods, so as to record the overall rise or fall in the company’s performance and profitability. To make the best use of your financial data, you need a robust toolkit with plenty of options for slicing and dicing information in meaningful ways. Financial statement analysis can be achieved using different approaches such as; financial ratios analysis, horizontal analysis, and vertical analysis. Vertical analysis is used to show the relative size of each item line of the income statement and the balance sheet. Both analyses provide valuable insights into a company’s financial health and performance.

This may not be enough of a difference to make a change, but if they notice this deviates from industry standards, they may need to make adjustments, such as reducing the amount of cash on hand to reinvest in the business. The figure below shows the common-size calculations on the comparative income statements and comparative balance sheets for Mistborn Trading. The highlighted part of the figure shows the number used as the base to create the common-sizing. In vertical analysis, ratios show how financial items relate to a base figure. Vertical analysis involves calculating percentages of line items based on a base figure for a period.

When applied to the balance sheet, vertical analysis allows stakeholders to understand the composition of assets, liabilities, and equity in relation to total assets. This assists in evaluating the financial structure, liquidity ratios, and the relative weight of different elements. Investors and analysts can use this information to gauge the financial risk and stability of a company. As it indicates the relative proportion of accounts, it is useful in identifying the cost centers that witness a sudden spike to negatively impact the profitability of a company.

This analysis can be particularly useful for detecting irregularities or fraud within financial statements. Horizontal analysis is especially important for well-established businesses that want to view performance over a period of time. For example, horizontal analysis allows you to easily spot trends, and view financial performance over a selected time frame. 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. Performing horizontal and vertical analysis is one of the best ways to obtain a clear picture of your company’s financial health.

The more periods you have to compare, the more robust your data set will be, and the more useful the insights gathered. You can find the balance sheets for public companies by searching the Securities and Exchange Commission database. Privately held companies often publish their financials in the investor relations section of their websites. If a company’s net sales were $1,000,000 they will be presented as 100% ($1,000,000 divided by $1,000,000).