Horizontal Analysis and Vertical Analysis are two ways to measure a company’s financial strength. They can be useful for
investors, creditors, management, and executives.
Horizontal Analysis
This type of analysis measures a company’s performance over a certain time period. For this you need 2 difference balance sheets for you to compare the change of one or more piece of financial data.
For example, if sales where at $1 billion one year and at $1.22 billion the next year that means sales increased by $220,000,000 or 22% over the period of 1 year.
You can use this figure to see if a company is growing or shrinking, or use it for their debt and see if they are paying off their debt, or getting more debt.
Vertical Analysis
This type of analysis only uses 1 balance sheet, but compares each category of the balance sheets.
For example Company XYZ has a total cash of $10 million dollars, total liabilities of $60 million and total equity of $30 million.
That means
Cash = 10%
Liabilities = 60%
Equity = 30%
This allows you to compare and analyze a balance sheet and make your own decision weather a company is being ran correctly or not.
