It depends on the choice of the base year and the chosen accounting periods on which the analysis starts. In other words, one can take year-on-year or quarter-on-quarter growth rates of all the items of the income statement or the balance sheet – based on the historical data. For example, in the income statement, we can, based on historical data and trends, make assumptions about sales growth and then forecast the sales growth rates through the forecast periods.

This means Banyan Goods saw an increase of $20,000 in net sales in the current year as compared to the prior year, which was a 20% increase. The image below shows the complete horizontal analysis of the income statement and balance sheet for Banyan Goods. Horizontal analysis is a powerful tool for understanding and evaluating a company’s financial performance over time. By examining year-to-year changes in key financial metrics, you can identify trends, assess stability, and make informed business decisions.

Calculate the horizontal analysis formula for each item you selected.

All of the amounts on the balance sheets and the income statements for analysis 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. Coverage ratios, like the cash flow-to-debt ratio and the interest coverage ratio, can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing. Horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry. The major distinction between horizontal and vertical analysis is that horizontal analysis compares numbers from multiple reporting periods, whereas vertical analysis compares figures from a single reporting period. As a result, some companies maneuver the growth and profitability trends reported in their financial horizontal analysis report using a combination of methods to break down business segments.

In this case, current assets were $200,000, and current liabilities were $100,000. Current assets were far greater than current liabilities for Banyan Goods and they would easily be able to cover short-term debt. CAGR measures the average annual growth rate of a financial metric over a specific period. It helps determine the consistent growth rate, smoothing out fluctuations in year-to-year changes.

Part 2: Your Current Nest Egg

One of the methods used to spot trends and growth patterns in a business over the years is horizontal analysis. Calculating the horizontal analysis of a balance sheet is a similar process. You can choose to run a comparative balance sheet for the periods desired, or complete a side-by-side comparison of two years. Select the base and comparison periods and the values for your chosen variable, then calculate the percentage change between them.

At least two of these statements are compared, but having and comparing three or more statements makes horizontal analysis easier, more accurate, and reliable. These changes are either in the form of dollar amount (variance) and percentage. You can calculate these changes by comparing items in the base accounting period with other items in subsequent periods and financial statements. Horizontal Analysis, also known as Trend Analysis, is an analysis technique in accounting used over financial statements such as balance sheets, statements of retained earnings, and income statements, among others.

Step 4: Analyze the trends and patterns identified through horizontal analysis

From the horizontal analysis, we observe that Company C has experienced consistent growth in total assets over the four-year period. The growth rates of 10%, 9.09%, and 8.33% indicate a horizontal analysis formula positive trend in the company’s asset accumulation. Based on the horizontal analysis, we observe that Company B’s operating expenses have gradually increased over the three-year period.

Given this outcome, they may want to consider stricter credit lending practices to make sure credit customers are of a higher quality. They may also need to be more aggressive with collecting any outstanding accounts. The information needed to compute times interest earned for Banyan Goods in the current year can be found on the income statement. Solvency Ratios – Just as the name implies, these ratios reveal how solvent a company is, most specifically, how capable of paying its long-term debts. Ensure the accuracy and completeness of the data, as any inaccuracies can affect the analysis results.