Horizontal Analysis

Horizontal analysis reads financial statements across the years, line by line. For each item, it calculates the change from one period to the next, often as a percentage of the earlier figure.

For example, if revenue rose from 1.8 million last year to 2.07 million this year, it grew by 270,000, or 15%. If operating expenses rose by 25% over the same period, the analysis highlights that costs are growing faster than sales, which may squeeze profits.

Horizontal analysis can also use a base year. Every year's figures are expressed as a percentage of the base year, making long-term trends easy to see. If revenue is 100 in the base year and 140 five years later, it has grown by 40% over the period.

This type of analysis is useful for spotting trends, unusual movements and potential problems, such as receivables growing much faster than sales, which could mean customers are paying more slowly.

Horizontal analysis complements vertical analysis. Horizontal analysis looks at change over time, while vertical analysis looks at the structure of the statements in a single period.