I’ve added a line for research & development costs as well. To perform vertical analysis (common-size analysis), we take each line item and calculate it as a percentage of revenue so that we can come up with “common size” results for both companies. Through our horizontal analysis, we know that Google has been growing at a faster and more sustained rate than Apple… but is it a relatively more profitable company? Do both companies profits seem to be sustainable? Let’s go back to our income statement items for Apple and Google. Vertical analysis, also called common-size analysis, focuses on the relative size of different line items so that you can easily compare the income statements and balance sheets of different sized companies.
Our horizontal analysis (time series analysis) is now officially complete. We can even take this one step further by calculating the compound annual growth rate for each line item from 2012 to 2016 (you can do this in Excel by using the function: =rate(nper, pmt, pv, fv)) – this tells us the average rate the companies grew in each year. We can perform horizontal analysis on the income statement by simply taking the percentage change for each line item year-over-year.īy 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. It’s almost impossible to tell which is growing faster by just looking at the numbers.
and to compare these factors among different companies.Īs an example, let’s take a look at some income statement items for Apple and Google. Horizontal allows you to detect growth patterns, cyclicality, etc. Horizontal analysis, also called time series analysis, focuses on trends and changes in numbers over time.
What is Horizontal Analysis Of Income Statements? Horizontal and Vertical Analysis of the Balance Sheet