Horizontal Analysis Definition, Formula, Example in Excel

As the name suggests, trend analysis involves identifying trends and predicting outcomes, which requires analyzing data from multiple consecutive periods. In this article, you will learn about the horizontal analysis of financial statements and how to incorporate it into your company’s accounting practices. You will also learn how to do horizontal analysis using an income statement and a balance sheet. Common-size financial statements express each line item as a percentage of a base amount, typically total revenue or total assets.

Financial Modeling Solutions

Explore our marketplace and find the perfect tool to streamline your processes today. By applying horizontal analysis in these practical scenarios, ManufacturingCo, Inc. enhances its financial decision-making processes and ensures adherence to regulatory standards. The selling and marketing expenses increased by 7.4% from Rs 43,438 million in 2023 to Rs 46,648 million in 2024. The general and administrative expenses also grew by 2.1% from Rs 39,426 million to Rs 40,250 million. The profit before tax marginally declined by 0.3% from Rs 98,438 million in 2023 to Rs 98,147 million in 2024. The net cash generated from operating activities for the year ended March 31, 2024, was Rs 176,216 million compared to Rs 130,601 million for the year ended March 31, 2023.

Trial Balance

• These formulas can be applied to various financial statement items, including revenue, expenses, net income, assets, liabilities, and equity.
• This example showcases how horizontal analysis of income statements can provide actionable insights into a company’s financial performance and guide decision-making.
• His knack for identifying opportunities and solving complex financial problems has earned him a reputation as a trusted finance expert.
• By assessing the changes in revenues, expenses, profits, assets, and liabilities, you can gauge the overall financial well-being of the organization.
• Ask questions about your data and receive instant visualizations, charts, and comprehensive financial analysis without manual spreadsheet work.
• By comparing financial results from prior periods with those from more recent periods, a company enhances its capacity to determine the direction and magnitude of account balance movements.
• Ask Sourcetable’s AI to benchmark against competitors and it will generate percentage or absolute comparisons to evaluate growth and profitability.

The income statement displays profitability, expenses, and revenue over a specified time frame. Analysts observe trends in critical accounts, including revenue, cost of goods sold, R&D costs, SG&A expenses, operating income, interest expense, and net profit, through horizontal analysis. Success is typically indicated by increasing revenues and net profit, while challenges are indicated by declines. Another problem with horizontal analysis is that some companies change the way they present information in their financial statements. This can create difficulties in detecting troublesome areas, making it horizontal analysis formula hard to spot changes in trends.

Step 4: Calculating Year-to-Year Changes

CAGR measures the average annual growth rate https://www.bookstime.com/articles/double-declining-balance-method of a financial metric over a specific period. It helps determine the consistent growth rate, smoothing out fluctuations in year-to-year changes. Carefully examine the percentage changes to understand the magnitude and significance of variations. Look for major fluctuations that may indicate critical events or shifts in the company’s operations.

• Here, for the sake of illustration, we have shown the absolute change (in US$) and percentage change (%) of all line items in the income statement between year 1 and year 2 only.
• Drag down the cell with the formula to copy it to the other current assets line items.
• Although the variance analysis is useful, it is not always easy to spot trends in the financial information.
• Explore the best Yahoo Finance API and its alternatives for automating financial data retrieval seamlessly.
• It would make more sense to compare the values for a specific quarter to the same quarter from past years.
• In the event that revenue was Rs. 100,000 in 2019 and Rs. 150,000 in 2020, the absolute change is Rs. 50,000; that is, Rs. 150,000 – Rs. 100,000.

You can do horizontal analysis using only two periods for the comparison, but it’s highly recommended you use more to avoid drawing and acting on less accurate conclusions. For example, if a company starts generating low profits in a particular year, expenses can be analyzed for that year. This makes it easier to spot inefficiencies and specific areas of underperformance. Either the data of the rest of the years is expressed as retained earnings a percentage of the base year or an absolute comparison is performed. We’re diving into some real-life examples that’ll make horizontal analysis as easy as pie—or at least easier than understanding your phone bill. Vertical and horizontal analyses are both tools for financial statement analysis, but they differ in purpose.