Horizontal analysis, also called "trend analysis," is used to discover trends in the earnings, assets and liabilities of a company over the course of several years. It compares each line of the balance sheet from year to year in terms of percentage change. To do a horizontal analysis, you will need the condensed balance sheets for the company that cover the years in question.
Start with the first two years you have balance sheets for. Go to the first item, current assets. Subtract the value for the first year from the second. Negative values are usually denoted by parentheses rather than minus signs. As an example, take a company whose first two lines are as follows for 2005, 2006 and 2007: Year: - - - - - - - - - - 2005 - - - 2006 - - - 2007 Current Assets - - $2,300 - - $2,600 - - $3,000 Fixed Assets - - - $5,400 - - $5,100 - - $4,700 The current assets from the second year (2006) minus the first (2005) is: $2,600 – $2,300 = $300.
Divide the difference between the years by the base year, in this case, the first year, and multiply by 100 to get a percentage. Continuing the example: ($300 / $2,300) x 100 = 13%.
Repeat the above for the following years. The second year becomes the base year next and so forth. Again, for the example: Current Assets 2007 – Current Assets 2006 = $3,000 – $2,600 = $400. ($400 / $2,600) x 100 = 15%.
Repeat the first three steps for each line of the balance sheet. Put the resulting percentage changes in next to the values in the appropriate year. Finishing the example: Year: - - - - - - - - - - 2005 - - - 2006 - - - - - - - 2007 Current Assets - - $2,300 - - $2,600 - 13% - $3,000 - 15% Fixed Assets - - - $5,400 - - $5,100 - - 6% - $4,700 - - 8%
Investigate the causes of large percentage changes.
- Financial Accounting: Tools for Business Decision Making; Paul Kimmel, Jerry Weygandt and Donald Kieso; York, PA: Wiley; 2004.