Not only does this information give vital data to investors and lenders that may alter stock prices or interest rates, but it also allows firm executives to assess their performance in relation to expectations or industry growth. However, an extra vertical analysis approach is required for management and innovators to make better-informed judgments. Learning how to read and understand an income statement can enable you to make more informed decisions about a company, whether it’s your own, your employer, or a potential investment. The analysis of the different items horizontal analysis in income statement is also done following the similar procedure. By using horizontal analysis, we can now clearly see that Google’s revenue, gross profit, and EBITDA grew faster than Apple’s in every year except for 2015 , with 2016 looking particularly rough for Apple. By comparing historical financial information you can easily determine your growth and position compared to your competitors. Note that the line-items are a condensed Balance Sheet and that the amounts are shown as dollar amounts and as percentages and the first year is established as a baseline.

If interest expense is $50,000 it will be presented as 5% ($50,000 divided by $1,000,000). The restated amounts result in a common-size income statement, since it can be compared to the income statement of a competitor of any size or to the industry’s percentages. The major distinction between horizontal and vertical analysis is that horizontal analysis compares numbers from multiple reporting periods, whereas vertical analysis compares figures from a single reporting period. Financial analysis of an income statement can reveal that the costs of goods sold are falling, or that sales have been improving, while return on equity is rising. Income statements are also carefully reviewed when a business wants to cut spending or determine strategies for growth. This type of analysis makes it simple to compare financial statements across periods and industries, and between companies, because you can see relative proportions.

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Horizontal Analysis – analyzes the trend of the company’s financials over a period of time. In this first example, I will be doing a horizontal analysis of Company A’s revenue based on its annual income statement. First, decide which periods you will be comparing, carefully choosing comparable periods. For example, if your industry is seasonal, comparing consecutive quarters would provide misleading results.

Just like we performed horizontal and vertical analysis on the income statement, we can also run these calculations on the balance sheet . The process to calculate these ratios is similar to the examples we went through above and are fairly straight forward. With horizontal analysis, you use a line-by-line comparison to the totals.

How to Do Horizontal Analysis?

For example, to find the growth rate of net sales for 2015, the formula is (Net Sales 2015 – Net Sales 2014) / Net Sales 2014. Likewise, we can do the same for all the other entries in the income statement. You do not need special financial skills to ascertain the difference between previous and last year’s data. However, it would be best if you had diligence, attention to detail, and a logical mind to decipher why the change happens.

To acquire relevant insights into how a firm is operating, it’s important to use several years of historical data for this analysis. This can assist in determining what is a definite pattern and what is a one-time occurrence. Finance analytics solutions, with their multiple capabilities, supply you with accurate and previously undetected important data, reducing any difficulties. It assists you in keeping track of your financial flows, including income and costs, across the board. After subtracting total costs from total revenue is referred to as a company’s overall profit. This usually entails a ratio study to see whether the company is adequately liquid and generates enough cash flow.