The terms horizontal and vertical analysis are parts of financial analysis, which is performed by business professionals in order to assess the profitability, viability, and feasibility of the business, or assignment.
Horizontal vs Vertical Analysis
The main 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, while the latter talks about each amount separately in the financial statement as a percentage for another amount.
The horizontal analysis or “trend analysis” takes into account all the amounts in financial statements over many years. The amounts from financial statements will be considered as the percentage of amounts for the base.
The vertical analysis considers each amount on the financial statement listed as a percentage of another amount.
Comparison Table Between Horizontal and Vertical Analysis (in Tabular Form)
| 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 takes into account the amounts present in the financial statements separately as a percentage of the total. |
| Goal | The goal here is to assess the trends that are 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 trend, 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 present within 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 of time | 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?
The horizontal analysis is conducted by finance professionals within a company or business in order to help evaluate the trend of an item over the past consecutive many years. This is why horizontal analysis is also called “Trend analysis”. In horizontal analysis, all the amounts in financial statements over many years taken into perspective and consider it the percentage of the complete statement.
Here, multiple periods of financial statements are used to evaluate horizontal analysis. It means that the report helps to show the change in amounts of the statement over a period instead of only the current year. The report that provides the change in accounts helps the professionals assess the growth of an item being sold, by comparing the profitability and financial aspects of the report for multiple years.
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 item grow in popularity and grab the interest of the company. The horizontal analysis can be used to assess balance sheets, retained earnings statements, fixed assets and income statements.
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?
Vertical analysis is conducted by financial professionals to make gathering and assessment of data more manageable, by using percentages to perform business analytics and comparison. Vertical analysis is a way of analysing financial statements which list each item as a percentage of a base figure within the statement of the current year.
Here, the vertical analysis can be used to understand the different proportions of each line item to the whole statement, and hence understand the trends for the current fiscal year.
It helps show the relative sizes of the accounts present within the financial statement. This can also help compare the companies present within the industry with the company performing the vertical analysis.
The above is done on balance sheets, retained earnings statements, fixed assets and income statements, and each line within these are considered separately as a percentage of the complete statement. But, when talking about the income statement, the vertical analysis indicates the amount as the percentage of gross sales.
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
- The horizontal analysis considers all the amounts in financial statements over many years while vertical analysis takes into account the amounts present in the financial statements separately as a percentage of the total.
- Horizontal analysis just compares the trend of the item over many periods by comparing the change in amounts in the statement. The vertical analysis shows the relative sizes of the accounts present within the financial statement.
- The goal of horizontal analysis is to assess the trend of an item. The purpose of vertical analysis is to evaluate the trend of a specific item with an everyday item within the current year.
- Horizontal analysis can only be used when considering an intra-firm wise comparison, while vertical analysis is used when talking about both inter-firm and intra-firm.
- The horizontal analysis takes into account multiple periods or years, such as a decade. And vertical analysis is concerned with items presented within the current fiscal year.
Conclusion
The concepts of horizontal and vertical analysis have been primary contributing tools for the expansion of businesses for the past many years. Horizontal analysis allows for a finance professional to analyse all the amounts in a financial statement that have been accumulated over the previous two or more periods since the company have conducted business.
This allows them to chart the trend growth and propose a better plan of action. Vertical analysis, instead, just takes each line or amount in the financial statement as an individual percentage of the whole amount. Both these techniques are different in all aspects, but they do help analyse the trend of the item of interest.
References
- https://www.unf.edu/~ggundlac/pdfs/pub_18.pdf
- https://pubs.geoscienceworld.org/ssa/bssa/article/95/5/1779/103169