Question

Can you explain and give us examples of what are vertical and horizontal financial analysis?

Answer 1

A useful approach to analyze financial statements is to perform either a vertical analysis or horizontal analysis of the statements. Both analysis approaches are similar in that the dollar amounts reported are converted to percentages. But the approaches differ in the base used for the computation of the percentages.

Horizontal analysis compares account balances and ratios over different time periods. For example, when comparing the sales of company in 2014 to its sales in 2015

Vertical analysis is also known as “common-size analysis”; because all the amounts for a specific year are converted into percentages for a key component in the financial statement. For example, in vertical analysis, gross margin and cost of goods sold are typically listed as a percentage of sales