Horizontal analysis, also known as trend analysis, is a financial technique used to evaluate financial statements over a series of periods. It aims to determine significant patterns, trends, and potential red flags within a company’s financial performance. The Horizontal Analysis Calculator facilitates this process by simplifying the calculation of absolute and percentage changes in financial statement lines across different periods. This tool is indispensable for investors, financial analysts, and business owners who wish to track financial performance metrics over time, aiding in strategic planning and decision-making processes.
Formula of Horizontal Analysis Calculator
The calculator employs two primary formulas:
Absolute Change Formula:
- Amount in Comparison Year: The value you’re analyzing in the year you’re comparing to, such as the current year.
- Amount in Base Year: The value you’re using as a reference point, for instance, the previous year.
Absolute Change = Amount in Comparison Year - Amount in Base Year
Percentage Change Formula:
Utilizes the same variables as the absolute change formula.
Percentage Change = [(Amount in Comparison Year - Amount in Base Year) / Amount in Base Year] * 100
Table for General Terms
| Term | Description | Example Use in Horizontal Analysis |
|---|---|---|
| Revenue Growth | Measures the percentage increase in revenue from one period to the next. | “A 10% revenue growth from Year 1 to Year 2” |
| Cost of Goods Sold (COGS) | The direct costs attributable to the production of the goods sold by a company. | “COGS decreased by 5% from 2020 to 2021” |
| Operating Expenses | Expenses required for the day-to-day functioning of the business. | “Operating expenses increased by 8% year-over-year” |
| Net Income | The total profit of the company after all expenses and taxes have been deducted from revenue. | “Net income saw a 15% rise from the previous year” |
| Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) | A measure of a company’s overall financial performance and is used as an alternative to net income. | “EBITDA grew by 20% from 2019 to 2020” |
| Assets | Resources owned by a company that have economic value. | “Total assets increased by 12% over the last year” |
| Liabilities | The company’s obligations or the amounts owed to creditors. | “Liabilities went up by 7% compared to last year” |
| Equity | The value returned to a company’s shareholders if all the assets were liquidated and all the debts were paid off. | “Equity rose by 5% year-on-year” |
Example of Horizontal Analysis Calculator
To illustrate the practical application of the Horizontal Analysis Calculator, consider a hypothetical scenario where a company’s revenue increased from $100,000 in the base year to $120,000 in the comparison year. Using the formulas provided:
Absolute Change in Revenue = $120,000 - $100,000 = $20,000
Percentage Change in Revenue = [($120,000 - $100,000) / $100,000] * 100 = 20%
This example demonstrates the calculator’s utility in providing quick and accurate assessments of financial performance changes.
Most Common FAQs
Horizontal analysis is a financial analysis method that compares historical financial data over a series of periods to identify trends, patterns, and fluctuations in a company’s performance.
It simplifies complex calculations, providing quick insights into financial trends and aiding in efficient decision-making.
While horizontal analysis can identify trends and potential areas of concern, predictions of future performance should consider a broader range of factors and analyses.