Horizontal Analysis Formula

Horizontal Analysis Formula (Table of Contents)

• Formula
• Examples
• Calculator

What is the Horizontal Analysis Formula?

The term “Horizontal Analysis” refers to the financial statement analysis in historical data from the income statement, balance sheet, and cash flow statement is compared with each other. In other words, it indicates the change either in absolute terms or as a percentage change year over year (Y-o-Y) in each of the line items. The formula for horizontal analysis (absolute terms) can be derived by deducting the amount in the base year from the amount in the comparison year. Mathematically, it is represented as,

The formula for horizontal analysis (% change) can be derived by dividing the difference between the amount in the comparison year and the base year’s amount in the base year. Mathematically, it is represented as,

Example of Horizontal Analysis Formula (With Excel Template)

Let’s take an example to understand the calculation of Horizontal Analysis in a better manner.

Example #1

Let us take the example of a company named ASD Inc., which is a manufacturer of precision components for tier I OEMs. From its latest annual report, the following income statement is available:

Solution:

Horizontal Analysis is calculated using the formula given below

Horizontal Analysis (absolute) = Amount in Comparison Year – Amount in Base Year

Similarly, Calculated for below

Horizontal Analysis is calculated using the formula given below

Horizontal Analysis (%) = [(Amount in Comparison Year – Amount in Base Year) / Amount in Base Year] * 100

Similarly, Calculated for below

In the above table, it can be seen that:

• The percentage change in gross profit has been relatively higher than that of net sales due to a lower increase in the cost of goods sold.
• Further, operating income and net income have also witnessed higher growth due to a lower increase in SG&A expense and income tax respectively.

Example #2

Let us take the annual report of Apple Inc. for the year 2018 to illustrate the financial statement’s preparation of horizontal analysis. In this case, we will be using the income statement and accordingly, the following information has been extracted from the annual report:

Solution:

Gross Profit is Calculated as

Similarly Calculated For Years 2017 and 2016.

Operating Income is Calculated as

Similarly Calculated For Years 2017 and 2016.

Net Income is calculated as

Similarly Calculated For Years 2017 and 2016.

Horizontal Analysis is calculated using the formula given below

Horizontal Analysis (%) = [(Amount in Comparison Year – Amount in Base Year) / Amount in Base Year] * 100

Similarly, Calculated for below

Similarly, Calculated for the year 2017

Similarly, Calculated for below

Conduct a horizontal analysis of Apple Inc.’s income statement and provide your insights on the same.

• The overall growth has been relatively higher in the year 2018 compared to that of the year 2017. Nevertheless, it indicates that the company has witnessed continuous growth in the last two years.
• Further, it is also noticed that the operating income moves in tandem with the revenue growth, which is a good sign.

Source Link: Apple Inc. Balance Sheet

Explanation

The formula for Horizontal Analysis can be calculated by using the following steps:

Step 1: Firstly, note the line item’s amount in the base year from the financial statement.

Step 2: Next, note the amount of the line item in the comparison year.

Step 3: Now, the formula for in absolute terms can be derived by deducting the amount in the base year (step 1) from the amount in comparison year (step 2), as shown below.

Horizontal Analysis (absolute) = Amount in Comparison Year – Amount in Base Year

Step 4: Finally, the formula for horizontal analysis in percentage can be derived by dividing the difference between the amount in the comparison year and the amount in the base year (step 3)  by the amount in the base year (step 1), as shown below.

Horizontal Analysis (%) = [(Amount in Comparison Year – Amount in Base Year)/ Amount in Base Year]* 100

Relevance and Use of Horizontal Analysis Formula

It is important to understand the concept of horizontal analysis because of the following reasons. It helps in determining the trend in each line item Y-o-Y. Any stark deviation in trend may be an indication of some anomaly in reporting that requires immediate investigation. It can be used to assess the performance of a company over a period of time. This analysis technique can provide an overall picture of where the subject company stands in terms of financial matters.

Horizontal Analysis Formula Calculator

You can use the following Horizontal Analysis Formula Calculator

Recommended Articles

This is a guide to Horizontal Analysis Formula. Here we discuss how to calculate the Horizontal Analysis along with practical examples. We also provide a Horizontal Analysis calculator with a downloadable excel template. You may also look at the following articles to learn more –

1. Cost-Benefit Analysis Formula
2. Break Even Analysis Formula
3. Vertical Analysis of Income Statement
4. Variance Analysis Formula
5. Different Types of Balance Sheet Ratios