Horizontal and vertical analysis

📊 Horizontal and Vertical Analysis

These are tools used to analyze financial statements over time (horizontal) or within a single period (vertical) to better understand trends and relationships between financial items.

1️⃣ Horizontal Analysis (Trend Analysis)

✅ Definition:

Horizontal analysis involves comparing financial data over two or more periods. It shows changes in values and percentage growth or decline from one period to another.

📌 Purpose:

• Identify growth trends or declines over time
• Spot patterns in revenues, expenses, or profits
• Track performance improvements or financial deterioration

🧮 Formula:

% Change = [(Current Year - Previous Year) / Previous Year] × 100

📋 Example:

✔️ This helps analysts track financial performance over time.

2️⃣ Vertical Analysis (Common-Size Analysis)

✅ Definition:

Vertical analysis involves expressing each item in a financial statement as a percentage of a base amount, such as total sales (in the income statement) or total assets (in the balance sheet).

📌 Purpose:

• Understand the relative size of components
• Make comparisons between companies of different sizes
• Identify cost structures and financial composition

🧮 Formulas:

For Income Statement:

Vertical % = (Item / Total Sales) × 100

For Balance Sheet:

Vertical % = (Item / Total Assets) × 100

📋 Example (Income Statement):

✔️ This shows how much of every ₹1 of sales goes to various costs and profit.

🔁 Comparison Table:

📌 Conclusion:

• Horizontal analysis helps you see how things are changing.
• Vertical analysis helps you understand what proportion each item represents. Together, they give a complete picture of financial health and performance.