Question

Discuss how a creditor of a business would use horizontal analysis in assessing the creditworthiness of a company.

Answer 1

Horizontal analysis is a technique wherein the financial statements of a company are analyzed over a number of accounting periods to observe trends. A creditor can observe how the long term liabilities of the company have increased or decreased over years. Further, a corresponding increase or decrease in current assets and long term assets can be analyzed to understand the source used to service the debts.The cash balance along with marketable securities can also be assessed to ascertain the liquid assets of the company. This can be extremely useful in assessing the credit worthiness of the company.