Horizontal Analysis Formula (Table of Contents)
What is Horizontal Analysis Formula?
Horizontal analysis is used to analyze financial statements (Balance sheet, income statement, cash flow statement) for the comparison of past data such as financial ratio analysis, expenses movement analysis, etc over a number of accounting periods.
The formula for horizontal analysis is as follows –
Horizontal Analysis Formula = (Absolute Change in Dollar Amount / Dollar in the Base Year) X 100
Examples of Horizontal Analysis Formula (With Excel Template)
Below are some examples of horizontal analysis in excel.
Horizontal Analysis Formula Example #1
USD 1 (2014) = INR 63.18
USD 1 (2019) = INR 71.64
Use the below-given data.
Change in Dollar Rate/ INR will be:-
Change in Dollar Rate/ INR = 13.39%.
It represents that dollar rate/ INR has increased by 13.39% as compared to the year 2014 which could be due to inflation or economic conditions of the country.
Horizontal Analysis Formula Example #2
Below is the example of a comparative balance sheet with horizontal analysis.
Horizontal Analysis Formula Example #3
Below is the example of a comparative P &L account with horizontal analysis.
- The above-mentioned Exhibit 2 and 3 shows analysis of balance sheet and P&L and Income statement as an absolute amount and as a % of change over last year. Using this analysis an investor or analysis can form his opinion about the company’s performance.
- For Instance, XYZ Inc. The company’s total assets increased by 19.74% and sales increased by 34.38%. A moderately percentage increase in sales was supported by a much smaller rate of increase in assets. Additionally, the 20.69% increase in inventory was also considerably less than the increase in sales.
- These results reflect quite encouraging on the company’s performance. In addition, the 34.38% increase in sales was accompanied by an increase in accounts receivable of only 17.86%; on the surface, the company’s sales growth was not associated with relaxation in credit policy.
- The Profit & Loss account states that the 38.10% gross profit increase out-stripped the rate of increase in sales, indicating a higher mark-up rate in the latest year. Net income, also, increased only 29.93%; due to higher sales resulting in higher Gross Profit Margin.
- From this confined analysis of comparative financial statements, an investor would conclude that operating performance for the current period appeared favorable.
- The above analysis has reported one reservation—operating expenses, particularly administrative expenses, have increased at a fairly high rate. Many selling expenses—such as sales salaries, commissions, and advertising—should rise somewhat proportionately with sales, but administrative expenses should not. An investigation of the reasons for the large increase in the latter expense might be indicated.
Use of Horizontal Analysis Formula
- An entity prepares its financial statements as per the generally accepted accounting principles (GAAP) which follows consistency and comparability of information/data presented in financial statements. Consistency refers to constantly use of accounting policies and methods over a period of time to accurately review of company’s financial statements. Comparability refers to reviewing the financials of two more companies.
- It can be concluded the Horizontal analysis formula is used to assess consistency in the preparation of financial statements as well as improves the comparability of growth in a company with that of its competitors.
- Horizontal analysis allows investors to look at what has been driving company’s financial performance over a number of years, and also help to see trend and growth pattern of asset, liabilities, income, expenses, financial ratios, etc.
Subject to which accounting year an investor has started from and how many accounting periods have chosen, the current period can be made appear to be good or bad. For instance, the current period’s result or profit can appear excellent when only compared with those of the previous quarter, but are really quite poor if compared to the results for the same quarter in the previous year.
A generic problem with horizontal analysis formula is the aggregation of financial information or data presented in financial statements that may have changed over time i.e. expenses, income, assets, liabilities may shift among different accounts, therefore misleading comparison of the account balance from one period to next. Furthermore, change in accounting policy or incident of a onetime event can impact horizontal analysis.
This has been a guide to the horizontal analysis formula. Here we discuss examples of horizontal analysis (balance sheet, p&l statement, income statement) and downloadable excel template. You can learn more about financial analysis from the following articles –