Horizontal Analysis
Introduction
Horizontal Analysis is a method used in financial statement analysis where the amounts of specific line items are compared over a certain period of time. It is also known as trend analysis. Horizontal analysis can be performed on absolute numbers from the financial statements, or on changes in the absolute numbers.
Purpose and Use
The main purpose of horizontal analysis is to compare historical data and identify significant trends, changes, and patterns. This information can be used by financial analysts, investors, and management to make informed decisions about the company's financial health and operational efficiency.
Methodology
In horizontal analysis, the financial statements of a company are taken for a number of years and they are compared line by line. For each line item, the value is compared with the value of the base year. The changes are noted down to see the trend. This helps in understanding whether the company's performance is improving or declining over the years.
Calculation
The calculation of horizontal analysis is quite simple. For each line item, the amount in the base year is subtracted from the amount in the current year. The difference is then divided by the amount in the base year. The result is then multiplied by 100 to get the percentage change.
Advantages of Horizontal Analysis
There are several advantages of horizontal analysis. It allows for easy comparison of performance over time. It helps in identifying trends and patterns. It provides a clear picture of the company's financial health. It is useful in forecasting future performance. It helps in identifying areas of strength and weakness.
Limitations of Horizontal Analysis
Despite its advantages, horizontal analysis has some limitations. It only provides a snapshot of the company's performance at a particular point in time. It does not provide a comprehensive view of the company's overall financial health. It is based on historical data and may not accurately predict future performance. It does not take into account external factors that may affect the company's performance.
Conclusion
In conclusion, horizontal analysis is a useful tool in financial statement analysis. It provides valuable insights into the company's performance over time. However, it should be used in conjunction with other methods of financial analysis to get a comprehensive view of the company's financial health.