Horizontal Analysis or Trend Analysis:
Definition and Explanation of Horizontal or Trend Analysis:
Comparison of two or more year's financial
data is known as horizontal analysis, or trend analysis.
Horizontal analysis
is facilitated by showing changes between years in both dollar and
percentage form as has been done in the example below. Showing changes in dollar form helps the analyst focus on
key factors that have affected profitability or financial position. Observe
in the example that sales for 2002 were up $4 million over 2001, but that
this increase in sales was more than negated by a $4.5million increase in
cost of goods sold. Showing
changes between years in percentage form helps the analyst to gain
perspective and to gain a feel for the significance of the changes that are
taking place. For example a $1 million increase in sales is much more
significant if the prior year's sales were $2 million than if the prior
year's sales were $20 million. In the first situation, the increase would be
50% that is undoubtedly a significant increase for any firm. In the second
situation, the increase would be 5% that is just a reflection of normal
progress.
Example of Horizontal or Trend Analysis:
Balance Sheet:
|
Comparative
Balance Sheet
December 31, 2002, and 2001
(dollars in thousands) |
|
|
|
|
Increase (Decrease) |
|
|
2002 |
2001 |
Amount |
Percent |
|
Assets |
|
|
|
|
|
Current Assets: |
|
|
|
|
|
Cash |
$1,200 |
$2,350 |
$(1,150)* |
(48.9)% |
|
Accounts
receivable |
6,000 |
4,000 |
2000 |
50% |
|
Inventory |
8,000 |
10,000 |
(2000) |
(20.0)% |
|
Prepaid Expenses |
3,000 |
120 |
180 |
150.0%
|
| |
---------- |
----------- |
---------- |
---------- |
|
Total current
assets |
$15,500 |
$28,970 |
(970) |
(5.9)%
|
| |
----------- |
----------- |
---------- |
--------- |
|
Property and equipment: |
|
|
|
|
|
Land |
4,000 |
4,000 |
0 |
0% |
|
Building |
12,000 |
8,500 |
3,500 |
41.2% |
| |
----------- |
----------- |
---------- |
|
|
Total property and equipment |
16,000 |
12,500 |
3,500 |
28% |
| |
---------- |
----------- |
---------- |
--------- |
|
Total assets |
31,500 |
28,970 |
2,530 |
8.7% |
| |
====== |
====== |
====== |
====== |
|
Liabilities and
Stockholders' Equity |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Accounts payables |
$5,800 |
$4,000 |
1800 |
45% |
|
Accrued payables |
900 |
400 |
500 |
125% |
|
Notes payables |
300 |
600 |
(300) |
(50%) |
| |
---------- |
---------- |
----------- |
--------- |
|
Total current liabilities |
7,000 |
5,000 |
2,000 |
40% |
| |
---------- |
---------- |
---------- |
----------- |
|
Long term liabilities: |
|
|
|
|
|
Bonds payable 8% |
7,500 |
8,000 |
(500) |
(6.3)% |
| |
---------- |
---------- |
---------- |
---------- |
|
Total long term liabilities |
7,500 |
8,000 |
(500) |
6.3% |
| |
---------- |
---------- |
---------- |
---------- |
|
Total Liabilities |
$145,00 |
13,000 |
1,500 |
(11.5)% |
|
Stock holders equity: |
|
|
|
|
|
Preferred stock, 100 par, 6%, $100
liquidation value |
$2,000 |
$2,000 |
0 |
0% |
|
Common stock, $12 par |
6,000 |
6,000 |
0 |
0% |
|
Additional paid in capital |
1,000 |
1,000 |
0 |
0% |
| |
---------- |
---------- |
--------- |
-------- |
|
Total paid in capital |
9,000 |
9,000 |
0 |
0% |
|
Retained earnings |
8,000 |
6,970 |
1,030 |
14.8% |
| |
---------- |
---------- |
---------- |
---------- |
|
Total stockholders' equity |
17,000 |
15,970 |
1,030 |
6.4% |
| |
---------- |
---------- |
---------- |
--------- |
|
Total liabilities and stockholders' equity |
$31,500 |
$28,970 |
$2,530 |
8.7% |
| |
===== |
====== |
====== |
====== |
*Since we are measuring the change between
2001 and 2002, the dollar amounts for 2001 become the base figure for
expressing these changes in percentage form. For example, cash decreased by
figures $1,150 between 2001 and 2002. This decrease expressed in percentage
form is computed as follows:
[$1,150 ÷ $2,350 = 48.9%] Other
percentage figures in this example are computed by the same formula. Income Statement:
Comparative income statement
and reconciliation of retained earnings
For the year ended December 31, 2002, and 2001
(dollars in thousands) |
| |
|
|
Increase (Decrease) |
| |
2002 |
2001 |
Amount |
Percent |
|
Sales |
$52,000 |
$48,000 |
$4,000 |
8.3% |
|
Cost of goods sold |
36,000 |
31,500 |
4,500 |
14.3% |
| |
------------ |
------------ |
------------ |
----------- |
|
Gross margin |
16,000 |
16,500 |
(500) |
(3.0)% |
| |
------------ |
------------ |
------------ |
------------ |
|
Operating expenses: |
|
|
|
|
|
Selling expenses |
7,000 |
6,500 |
500 |
7.7% |
|
Administrative expense |
5,860 |
6,100 |
(240) |
(3.9)% |
| |
------------ |
------------ |
------------ |
------------ |
|
Total operating expenses |
12,860 |
12,600 |
260 |
2.1% |
| |
------------ |
------------ |
------------ |
------------ |
|
Net operating income |
3,140 |
3,900 |
(760) |
(19.5)% |
|
Interest expense |
640 |
700 |
(60) |
(8.6)% |
| |
------------ |
------------ |
------------ |
------------ |
|
Net income before taxes |
2,500 |
3,200 |
(700) |
(21.9)% |
|
Less income taxes (30%) |
750 |
960 |
(210) |
(21.9)% |
| |
------------ |
------------ |
------------ |
------------ |
|
Net income |
1,750 |
2,240 |
$ (490) |
21.9% |
| |
|
|
====== |
|
|
Dividends to preferred stockholders, $6 per
share (see balance sheet above) |
120 |
120 |
|
|
| |
------------ |
------------ |
|
|
|
Net income remaining for common stockholders |
1,630 |
2,120 |
|
|
|
Dividend to common stockholders, $1.20 per
share |
600 |
600 |
|
|
| |
------------ |
------------ |
|
|
|
Net income added to retained earnings |
1,030 |
1,520 |
|
|
|
Retained earnings, beginning of year |
6,970 |
5,450 |
|
|
| |
------------ |
------------ |
|
|
|
Retained earnings, end of year |
$ 8,000 |
$ 6,970 |
|
|
| |
======= |
======= |
|
|
Horizontal analysis of financial statements can also be carried out
by computing trend percentages.
Click here
to read about trend percentage.
You may also be interested in other relevant articles:
Profitability ratios:
Liquidity ratios:
Activity ratios:
Leverage ratios or long term
solvency ratios:
|
|
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