Horizontal Analysis

Loading the player...

What is a 'Horizontal Analysis'

A horizontal analysis, or trend analysis, is a procedure in fundamental analysis in which an analyst compares ratios or line items in a company's financial statements over a certain period of time. The analyst uses his discretion when choosing a particular timeline; however, the decision is often based on the investing time horizon under consideration.

BREAKING DOWN 'Horizontal Analysis'

Horizontal analysis allows investors and analysts to determine how a company has grown over time. Additionally, analysts and investors could use horizontal analysis to compare a company's growth rates in relation to its competitors and industry. For example, when you hear someone saying that revenues increased by 10% this past quarter, that person is using horizontal analysis. Horizontal analysis can be used on any item in a company's financials from revenues to earnings per share (EPS) and is useful when comparing the performance of various companies.

Horizontal Analysis Example

Horizontal analysis looks at the trend of financial statements over multiple periods, using a specified base period. Horizontal analysis typically shows the changes from the base period in dollar and percentage. The percentage change is calculated by first dividing the dollar change between the comparison year and the base year by the item value in the base year, then multiplying the quotient by 100%.

For example, assume an investor wishes to invest in company XYZ. The investor may wish to determine how the company grew over the past year. Assume that in company XYZ's base year, it reported net income of $10 million and retained earnings of $50 million. In the current year, company XYZ reported net income of $20 million and retained earnings of $52 million. Consequently, it has in increase of $20 million in its net income and $2 million in its retained earnings year over year (YOY). Therefore, company ABC's net income grew by 100% YOY, while its retained earnings only grew by 4%.

Vertical Analysis vs. Horizontal Analysis

The difference between horizontal analysis and vertical analysis is that vertical analysis involves listing each item on a company's financial statement as a separate column. For example, in vertical analysis, cost of goods sold (COGS) and gross margin are typically listed as a percentage of sales. Assume company ABC reported sales of $50 million and had COGS of $25 million. Therefore, company ABC has a gross profit margin of $25 million. In vertical analysis, a column would be used to indicate the percentage of sales, which would show sales as 100%, COGS as 50% and gross profit margin of 50%.

RELATED TERMS
  1. Horizontal Well

    A well that is turned horizontally at depth, and that allows ...
  2. Stock Analysis

    Stock analysis is a term that refers to the evaluation of a particular ...
  3. Horizontal Merger

    A merger occurring between companies in the same industry. Horizontal ...
  4. Horizontal Acquisition

    The acquisition of one company by another in the same industry. ...
  5. Gross Margin Return On Investment ...

    An inventory profitability evaluation ratio that analyzes a firm's ...
  6. Gross Margin

    A company's total sales revenue minus its cost of goods sold, ...
Related Articles
  1. Investing

    Explaining Financial Statement Analysis

    Financial statement analysis is the process of reviewing a company’s statements to gain an understanding of its financial health.
  2. Markets

    Understanding Horizontal Integration

    Horizontal integration is the acquisition or internal creation of related businesses to a company’s current business focus.
  3. Investing

    Value Investing: Finding Value In Income Statements

    A company's income statement basically tells you how much money it has taken in and how much it has paid out over a year or a quarter. Looking at the annual income statement rather than a quarterly ...
  4. Investing

    Detecting Financial Statement Fraud

    Fraudulent financial statements account for about 10% of the white-collar crime incidents reported each year.
  5. Investing

    Understanding the Income Statement

    The best way to analyze a company—and figure out if it's worth investing in—is to know how to dissect its income statement. Here's how to do it.
  6. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  7. Investing

    Explaining Financial Analysis

    Financial analysis is a general term that refers to using financial data to make business and investment decisions.
  8. Trading

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  9. Investing

    What Is Year Over Year?

    Year over year measures performance in one time period versus performance in a previous time period.
  10. Trading

    Fundamental Analysis For Traders

    Find out how this method can be applied strategically to increase profit.
RELATED FAQS
  1. How can I find net margin by looking a company's financial statements?

    Learn how to calculate a company's net margin using financial statements by dividing the company's net revenues by its net ... Read Answer >>
  2. What impact does the growth in horizontal drilling have in the oil and gas sector?

    Read about the development of horizontal drilling for oil and natural gas and how the oil and gas sector has benefited from ... Read Answer >>
  3. Is it better to use fundamental analysis, technical analysis or quantitative analysis ...

    Understand the difference between fundamental, technical and quantitative analysis, and how each measurement helps investors ... Read Answer >>
  4. How does ratio analysis make it easier to compare different companies?

    Learn what ratio analysis is, how investors can compare companies within the same sector using ratio analysis and how ratios ... Read Answer >>
  5. How are retained earnings related to a company's income statement?

    Understand what a company's statement of retained earnings represents and how it is related to a company's other financial ... Read Answer >>
  6. What are the differences between gross profit and gross margin?

    Learn how gross profit and gross margin are calculated and how each is used in fundamental analysis. Generally, these numbers ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center