Friday, 27 April 2012

Horizontal vs Vertical Financial Analysis

I was asked by a student to explain and give examples of the difference between horizontal and vertical financial analysis:

Horizontal Financial Analysis 
Looks at year over year trends.

  • Year over year sales growth
  • Year over year trends (ie. debt to equity ratio, liquidity ratios, etc.)

Vertical Financial Analysis 
Profitability analysis is an example of a vertical financial analysis - Contribution margin, profit margin and gross profit rates. Here  we look at how a financial statement item relates to another within the same year.

  • Net income as a % of sales
  • Gross Profit as a % of sales
  • Expenses as a % of Net Income
The two types of analysis go hand in hand as we often look at how a company's various components are performing in relation to key financial figures like sales or net income, but we also look at how this has been trending throughout the years to get a complete picture.

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