Horizontal Analysis

What Is Horizontal Analysis?

Horizontal analysis is a method of reviewing financial statements by comparing the same line item across two or more reporting periods. Instead of looking at one year's income statement or balance sheet in isolation, an investor lines up several years side by side and measures how each figure has grown, shrunk, or stayed flat. It is sometimes called trend analysis because its main purpose is to reveal patterns over time.

How It Works

The analyst chooses a base year, which is usually the earliest period in the set. Each later year is then compared with that base. Two measures are typically shown:

• The dollar change, which is the later amount minus the base amount.
• The percentage change, which expresses that dollar change relative to the base.

The percentage change is calculated as follows:

Percentage change = (Current period amount − Base period amount) ÷ Base period amount × 100

Because the result is stated relative to the base, items of very different sizes can be compared on the same scale.

An Example

Suppose a company reports revenue of 500 million in Year 1 and 600 million in Year 2. The dollar change is 100 million, and the percentage change is 20 percent. If its cost of goods sold moved from 300 million to 330 million, the percentage change is 10 percent. Setting these results against each other shows that revenue grew faster than costs, which may suggest improving margins. Horizontal analysis does not prove why this happened, but it points the investor toward the questions worth asking.

Why It Matters to Investors

Horizontal analysis is useful for spotting growth rates, sudden jumps or declines, and unusual shifts in expenses, debt, or cash. It is most informative when applied over several years, since a single year-to-year change can be distorted by one-time events. Its main limitation is that it only shows change, not the cause of change, and changes in accounting methods or acquisitions can make periods hard to compare directly. For this reason, analysts often pair it with vertical analysis and ratio analysis to build a fuller picture.