Horizontal analysis of the company’s financial claims is the comparison of income or expenditure headings or other items in the accounts over a particular time frame, such as several accounting intervals. This evaluation is often performed by a potential investor analyzing the accounts of an organization where an investment is to be made, but could also be performed by other stakeholders such as loan creditors or by rivals.
The job of horizontal analysis is manufactured easier for investors by accounting specifications which generally require the disclosure in the financial claims of equivalent figures for previous periods, facilitating assessment between periods. As the goal of the horizontal analysis is to start to see the direction or trend of certain numbers or ratios more than a time period it is often known as trend analysis. An investor may perform horizontal evaluation, not just for just one company but for a number of companies in a specific industry, to get a basic idea of the performance of the many businesses in that industry.
The comparison of figures over two or more periods may take the form of an examination of the increase or decrease in the figures over time or an analysis of the percentage increase or decrease. The evaluation could be employed to individual income or expenditure headings or could take the proper execution of the assessment of ratios. An analysis may show the result in conditions of both dollar and percentage changes. Although a horizontal analysis could be performed for all your items in a specific financial statement, the investor may be thinking about certain ratios or items in particular. The analysis would then be concentrated on these particular figures.
The horizontal evaluation undertaken must be in line with the goals and needs of the individual or organization performing the analysis. If the aim of the evaluation is to look at the solvency of the target company, the most relevant financial ratios should be analyzed. If the target is to analyze the success of the business, appropriate figures like the gross profit ratio or net revenue ratio should be the subject of the horizontal evaluation. 300,000. A food handling company that views the Britannia Pudding Corporation as a potential takeover target aims to assess its profitability using a horizontal evaluation.
The trader, therefore, examines the figures for the prior accounting season which can be found as comparative figures on the existing financial statements. What Does the Horizontal Analysis LET YOU KNOW? The approach is illustrated by walking through an example of a horizontal analysis. The potential trader wants to analyze the trend in profitability of the Britannia Pudding Corporation and as a first step looks at the tendency in sales.
400,000.The sales have therefore increased by 25% in the entire year. The investor will discover this as a positive sign but will wish to look further into the company’s sales strategy and plans for future years. This evaluation is therefore only a first indication of the budget of the ongoing company.
It is historic data that can provide an indication of future developments but more information would be had a need to back this up. An additional valuable bit of data that may be extracted by horizontal analysis is the trend in the company’s gross profit margin. This percentage is computed by dividing the gross profit by sales and expressing the full total result as a share.
- Once a cash discount period has handed
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800,000 which is 40% of sales. The pattern in the gross profit percentage is also up-wards therefore. 800,000 which can be an increase of 33.3% over both periods. The trader will then go through the world-wide web revenue. The investor, however, will require further information to enable a rational decision to be made on investing in the ongoing company.
For example, the investor must take a look at why the web revenue has increased. This could be due to increased sales entirely, partly due to better control of operating costs or the figure could be affected by the company’s pricing policy. 500,000 in the time, a rise of 25%. This may indicate that there surely is an opportunity for reducing these expenditures and thus increasing the net profit in the foreseeable future.
More detailed analysis of the operating expenditures would be needed before drawing any strong conclusions. A potential investor looking to dominate the Britannia Pudding Corporation and expose new management strategies could see this as a chance. An investor executing financial evaluation must be certain that the financial information forming the foundation of the evaluation is accurate. The data for the evaluation should be taken from audited financial claims for the most recent accounting intervals.