Difference Between Horizontal and Vertical Analysis with Comparison Chart

Vertical analysis, horizontal analysis and horizontal vs vertical analysis financial ratios are part of financial statement analysis. Vertical analysis offers a clear view of company finances at a certain time. Horizontal analysis can thus give an insight into how a company is growing.

Comparison Chart

On the other hand, in vertical financial analysis, an item of the financial statement is compared with the common item of the same accounting period. Like horizontal analysis, vertical analysis is used to mine useful insights from your financial statements. It can be applied to the same documents, but is exclusively percentile-based and travels (as the name implies) vertically within each period across periods, rather than horizontally across periods. Vertical analysis breaks down a company’s finances to reveal its economic standing.

This makes financial data easy to compare and understand, showing how a company operates and makes money. Horizontal analysis refers to the comparison of financial information such as net income or cost of goods sold between two financial quarters including quarters, months or years. This means Mistborn Trading saw an increase of $20,000 in revenue in the current year as compared to the prior year, which was a 20% increase. The same dollar change and percentage change calculations would be used for the income statement line items as well as the balance sheet line items. The figure below shows the complete horizontal analysis of the income statement and balance sheet for Mistborn Trading. Moreover, it also helps in comparing the numbers of a company between different time periods , be it quarterly, half-yearly or annually.

All of the amounts on the balance sheets and the income statements will be expressed as a percentage of the base year amounts. The amounts from the most recent years will be divided by the base year amounts. For instance, if a most recent year amount was three times as large as the base year, the most recent year will be presented as 300. If the previous year’s amount was twice the amount of the base year, it will be presented as 200.

• So, common size financial statement not only helps in intra-firm comparison but also in inter-firm comparison.
• Horizontal analysis (also known as trend analysis) looks at trends over time on various financial statement line items.
• On the other hand, reduced investments and bank balance may indicate a deterioration in the cash flow/liquidity position.
• Seeing the horizontal analysis of every item allows you to more easily see the trends.
• Often expressed in percentages or monetary terms, it provides insights into factors that significantly affect the profitability of an organization.

B. When to Use Each Method

Horizontal analysis and vertical analysis are two common methods used in financial statement analysis. Horizontal analysis involves comparing financial data over a period of time, typically multiple years, to identify trends and changes in performance. It helps to assess the growth or decline of specific line items such as revenue, expenses, or net income. On the other hand, vertical analysis involves comparing different line items within a single period, typically a single year, to determine their relative proportions and significance. It helps to understand the composition of financial statements by expressing each line item as a percentage of a base figure, such as total revenue or total assets.

Why Financial Analysis is Important for Your Business

This analysis can be particularly useful for detecting irregularities or fraud within financial statements. Horizontal analysis is especially important for well-established businesses that want to view performance over a period of time. For example, horizontal analysis allows you to easily spot trends, and view financial performance over a selected time frame. The 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. The latter discusses each amount separately in the financial information as a percentage for another amount. Performing horizontal and vertical analysis is one of the best ways to obtain a clear picture of your company’s financial health.

The following example shows ABC Company’s income statement over a three-year period. There’s a wealth of data lurking inside your company’s financial statements—and if you know how to analyze it effectively, you can transform financial information into actionable insights. Two of the most common, and effective, ways to do so are horizontal analysis and vertical analysis.

• For example, you could find labor expenses for the current financial year as a percentage of total revenue for the current financial year.
• This method examines each financial statement item in relation to a base figure, typically total sales or assets.
• Percentages are worked on the basis of a selected base year and then compared.
• Various stakeholders such as shareholders, investors, creditors, banks etc. assess and analyze the financial statements.
• For example, if Mistborn Trading set total assets as the base amount and wanted to see what percentage of total assets were made up of cash in the current year, the following calculation would occur.

How are financial ratios used in both horizontal and vertical analysis?

Both horizontal and vertical analysis hold their own place in financial statements analysis. While each has its distinct advantages and disadvantages, they are often used together to give a more comprehensive comparative picture to stakeholders. They, together, are key to understanding the financial position of a business entity.

© 2025 Anamma – Financial strategies, investment tips, and market analysis to help you achieve financial independence and multiply your wealth. Thomas Richard Suozzi (born August 31, 1962) is an accomplished U.S. politician and certified public accountant with extensive experience in public service and financial management. She has held multiple finance and banking classes for business schools and communities. While this may sound confusing, it’s simply another way of looking at company performance. One of the most important tasks in financial accounting is accurate reporting.

The common size percentage can also be used to compare different companies within the same industry or companies that use different currencies. Although both horizontal and vertical analysis is used in the analysis of financial statements, they have several differences. Both, however, are important when it comes to business decisions based on the performance. Horizontal analysis, also known as trend analysis, focuses on comparing financial data over a specific period.

This method examines each financial statement item in relation to a base figure, typically total sales or assets. The article horizontal vs vertical analysis looks at meaning of and differences between two ways of analyzing financial statements – horizontal analysis and vertical analysis. Horizontal analysis looks at financial statements that can span multiple periods or even multiple years, while vertical analysis usually concentrates on a single accounting period. We’ll examine both horizontal and vertical analysis, what each method offers, the differences between them, and how to complete a horizontal and vertical analysis using your financial statements. Horizontal analysis also allows for the identification of anomalies or outliers in financial data. Sudden spikes or drops in specific line items can be investigated further to understand the underlying causes.

Horizontal vs Vertical Analysis: A Guide to Performance Evaluation and Ratio Analysis

For instance, if the percentage of research and development expenses has been consistently increasing over the years, it may indicate a company’s focus on innovation and future growth. One of the key benefits of vertical analysis is its ability to highlight the relative importance of different line items within a financial statement. By expressing each item as a percentage, businesses can easily compare and evaluate the significance of various components. For example, a company may find that its cost of goods sold represents a higher percentage of net sales compared to industry averages, indicating potential inefficiencies in the production process. Vertical analysis shows a comparison of a line item within a statement to another line item within that same statement.

Percentages are worked on the basis of a selected base year and then compared. On the other hand, vertical analysis provides a close-up of financial statement results and the relationship to a specific benchmark. The single biggest difference between horizontal and vertical analysis is the focus. In this analysis, the very first year is considered as the base year and the entities on the statement for the subsequent period are compared with those of the entities on the statement of the base period.