Short definition: Horizontal analysis is a financial analysis technique that compares financial data over a period of time to identify trends and changes in a company’s performance.
Explanation: It involves comparing line items in financial statements (like the balance sheet or income statement) across multiple periods, typically years or quarters. This analysis helps identify growth or decline patterns, track changes in key financial metrics, and pinpoint areas of strength or weakness in a company’s financial performance.
Example: A horizontal analysis of a company’s revenue over the past three years might show a 10% increase in year one, a 5% decrease in year two, and a 15% increase in year three. This analysis reveals a fluctuating trend but overall positive revenue growth.
Additional information (optional): Horizontal analysis can be expressed in absolute dollar amounts or as percentage changes from a base year. It is a useful tool for investors, analysts, and management to evaluate a company’s performance over time and identify areas for improvement or potential risks.