How do we perform horizontal analysis? Why would we want to perform this tool of financial statement analysis?
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Example Answers:(Please dont copy paste the same answers)
Horizontal analysis is looking at data across time that is usually two or more periods. According to our book, there are two ways to perform horizontal analysis; comparing values over time and computing the percentage of change. Page 4-38
We would want to perform this analysis with the financial statements because it can indicate the health/ growth of a company. We can compare many different aspects to see what is the driving force of a number. For example, a companys revenue is down from the last 3 years? Is the revenue less than last year? Are the expenses more than last year? Comparing across time helps tell the whole story of a company rather than just a look at a single period in time.
By doing a horizontal analysis, we can determine trends and also find outliers. These outliers can some times tell an interesting story. For example, a horizontal analysis that I like to do, is looking at different companys stock price over 1 and 5 years. If there is a large dip in the stock price, I usually look up that company and the dates around it to see what happened. There is some times a story about the company or a world event that can explain it. During the year you can generally see when a company announced earnings because the price quickly rises or dips. For most companies, you can see a significant drop in stock price in March of 2020 due to Covid.
A horizontal analysis is the analysis of financial data over time. Comparing data over two or more consecutive periods assists in analyzing trends in company performance and predicting future performance. There are 2 ways to do this:
- Compare the veritical analysis over time. Looking for changes year over year once the balance sheet or income statement is expressed in percentage terms allows us to look for trends or changes year over year. This helps to point out ares for further research to better understand unusal or concerning trends.
- Compute the percentatge change for each line item as follows: (current balance – previous balance)/previous balance.By closely analyzing this, we can monitor if the company’s performance is improving or declining. (textbook p. 4-38)
The horizontal analaysis is really good at helping spot trends over time. This allows us to take a closer look to better understand the implications these changes may have, good or bad.