Horizontal Analysis

Horizontal analysis is a financial statement analysis technique

that shows changes in the amounts of corresponding financial
statement items over a period of time. It is a useful tool to
evaluate the trend situations.
The statements for two or more periods are used in horizontal
analysis. The earliest period is usually used as the base period
and the items on the statements for all later periods are
compared with items on the statements of the base period. The
changes are generally shown both in dollars and percentage.
Dollar and percentage changes are computed by using the
following formulas:
Dollar change=(Amount of the item in comparison year
Amount of the item in base year)
Percentage change= (Dollar change Amount of the item
in base year) 100
Horizontalanalysis may be conducted for balance sheet, income
statement, schedules of current and fixed assets and statement of
retained earnings.

Comparative balance sheet with horizontal

analysis:
 For the year ended 2015-2016
2016 2015 Increase or Decrease
Amount Percent
Assets
Current
Assets
Cash & cash 7990 4884 3106 63.5%
equivalents
Short term 1306 921 385 41.8%
investments
Inventories 8401 8153 248 3.04 %

Trade and 12411 12252 159 1.29%

other
receivables
Prepayments 573 583 -10 -1.71%
& accrued
income
Derivative 550 337 213 63.2%
assets
Current 786 874 -88 -10.06%
income tax
assets
Assets held 25 1430 -1405 -98.25%
for sale

Total 32042 29434 2608 8.88%

current
assets

2016 2015 Increase or Decrease

Amount Percent
 Non-
current
Assets
Property, 27554 26576 978 3.68%
plant &
equipment
Goodwill 33007 32772 235 0.71%

Intangible 20397 19236 1161 6.0%

assets
Investments 10709 8675 2034 23.42%
in joint
ventures
Financial 5719 5419 300 5.53%
assets
Employee 310 109 201 184.4%
benefits
assets
Current 114 128 -14 10.9%
income tax
assets
Deferred tax 2049 1643 406 24.71%
assets

Total non- 99859 94558 5301 5.60%

current
assets

Total assets 131901 123992 7909 6.37%

2016 2015 Increase or Decrease

Amount Percent
 Liabilities
& Equity
Current
liabilities
Financial 12118 9629 2489 25.84%
debts
Trade & 18629 17038 1591 9.33%
other
payables
Accruals & 3855 3673 182 4.95%
deferred
income
Provisions 620 564 56 9.92%
Derivative 1068 1021 47 4.60%
liabilities
Current 1221 1124 97 8.62%
income tax
liabilities
Liabilities 6 272 -266 97.79%
associated
with assets
held for sale

Total 37517 33321 4196 12.59%

current
liabilities

Non-
current
liabilities
Financial 11091 11601 -510 -4.39%
debt
Provisions 2640 2601 39 1.49%
Deferred tax 3865 3063 802 26.18%
liabilities

Other 2387 1729 658 38.05%

payables

Total non- 28403 26685 1718 6.43%

current
liabilities

Total 65920 60006 5914 9.85%

liabilities

Equity

Share capital 311 319 -8 -2.50%

Treasury (990) (7489) (6499) 86.78%

shares
Translation (18799) (19851) (1052) 5.29%
reserve
Other 1198 1345 (147) -10.92%
reserves
Retained 82870 88014 (5144) -5.84%
earnings
Total equity 64590 62338 2252 3.61%
attributable
to
shareholders
Non- 1391 1648 (257) -15.59%
controlling
interests
Total equity 65981 63986 1995 3.11%
Total 131901 123992 7909 6.37%
liabilities&
equity

Comparative income statement with horizontal

analysis

2016 2015 Increase or decrease

Amount Percent
Sales 89469 88785 684 0.77%
Other revenue 317 298 19 6.37%
Cost of goods (44199) (44730) (531) -1.18%
sold
Distribution (8059) (7899) 160 2.02%
expenses
Marketing & (21485) (20744) 741 3.57%
administration
expenses
Research & (1736) (1678) 58 3.45%
development
costs
Other trading 99 78 21 26.92%
income
Other trading (713) (728) (15) (2.06%)
expenses
Trading 13693 13382 311 2.32%
operating
profit
Other operating 354 126 228 180.9%
income
Other operating (884) (1100) (216) (19.63%)
expenses
Operating 13163 12408 755 6.08%
profit

Financial 121 101 20 19.80%

income
Financial (758) (725) 33 4.55%
expense
Profit before 12526 11784 742 6.29%
taxes,
associated with
joint ventures
Taxes (4413) (3305) 1108 33.52%
Income from 770 988 (218) (22.06%)
associates &
joint ventures
Profit for the 8883 9467 (584) (6.16%)
year

Interpretation:
In the above horizontal analysis, 2015 is the base year and 2016
is the comparison year. All items on the balance sheet & income
statement for the year 2016 have been compared with the items
of balance sheet & income statement for the year 2015.
The actual changes in items are compared with the expected
changes. For example, if management expects the increase in
sales is 30% but the actual sales only increase by 10%, it needs
to be investigated.
 Vertical Analysis:
Vertical analysis is a method of financial statement analysis in
which each entry for each of the three major categories of
accounts, assets and liabilities and equities, in a balance sheet
represented as a proportion of the total account.
Vertical analysis reports each amount on a financial
statement as a percentage of another item. For example, the
vertical analysis of the balance sheet is restated to be a
percentage of total assets. If inventory is $100,000 and total
assets are $400,000 then inventory is presented as 25($100,000
divided as $400,000).
Vertical analysis of an income statement results in every income
statement amount being presented as a percentage of sales. If
sales were $1,000,000 they would be restated to be
100($1,000,000 divided by$1,000,000).
Comparative balance sheet with Vertical analysis
Nestles Balance sheet
For the year ended 2015-2016

2016 % of total 2015 % of total

assets assets
Assets
Current
Assets
Cash & cash 7990 6.05% 4884 3.93%
equivalents
Short term 1306 0.99% 921 0.74%
investments
Inventories 8401 6.36% 8153 6.57%

Trade and 12411 9.40% 12252 9.88%

other
receivables
Prepayments 573 0.43% 583 0.47%
& accrued
income
Derivative 550 0.41% 337 0.27%
assets
Current 786 0.59% 874 0.70%
income tax
assets
Assets held 25 0.018% 1430 1.15%
for sale

Total 32042 24.2% 29434 23.7%

current
assets

2016 2015

Non
currentAssets
Property,plant 27554 20.8% 26576 21.43%
& equipment
Goodwill 33007 25% 32772 26.43%

Intangible 20397 15.4% 19236 15.5%

assets
Investments in 10709 8.11 8675 6.99%
joint ventures
Financial 5719 4.3% 5419 4.37%
assets
Employee 310 0.23% 109 0.08%
benefits assets
Current 114 0.08% 128 0.10%
income tax
assets
Deferred tax 2049 1.5% 1643 1.32%
assets

Total non- 99859 75% 94558 76.2%

current
assets
Total 2016 %of total 2015 %of total
Liabilities liabilities liabilities
Liabilities &
Equity
Current
liabilities
Financial 12118 9.18% 9629 7.7%
debts
Trade & other 18629 14.1% 17038 13%
payables

Accruals & 3855 2.92% 3673 2.96%

deferred
income
Provisions 620 0.47% 564 0.45%
Derivative 1068 0.80% 1021 0.82%
liabilities
 Current 1221 0.92% 1124 0.90%
income tax
liabilities
Liabilities 6 0.08% 272 0.2%
associated
with assets
held for sale

Total current 37517 28.4% 33321 26.8%

liabilities

Non-current
liabilities

Financial debt 11091 8.4% 11601 9.3%

Provisions 2640 2.0% 2601 2.0%

Deferred tax 3865 2.9% 3063 2.4%
liabilities

Other 2387 1.8% 1729 1.3%

payables

Total non- 28403 21.5% 26685 21.5%

current
liabilities

Total 65920 49.9% 60006 48.3%

liabilities

Owner
Equity
Share capital 311 0.23% 319 0.2%
Treasury (990) 0.75% (7489) 6%
shares
Translation (18799) 14% (19851) 16%
reserve
Other reserves 1198 0.90% 1345 1.08%

Retained 82870 62% 88014 70%

earnings
Total equity 64590 48% 62338 50%
attributable to
shareholders
Non- 1391 1.12% 1648 1.32%
controlling
interests
Total equity 65981 50% 63986 51.6%

Total 131901 100% 123992 100%

liabilities&
equity
Comparative income statement with Vertical
analysis
Nestles income statement
For the year 2015-2016
2016 2015

Sales 89469 100% 88785 100%

Other revenue 317 3.5% 298 0.3%
Cost of goods (44199) 49.4% (44730) 50.3%
sold
 Distribution (8059) 9% (7899) 8.89%
expenses
Marketing & (21485) 24% (20744) 23%
administration
expenses
Research & (1736) 1.94% (1678) 1.8%
development
costs
Other trading 99 78 0.01%
income 0.11%
Other trading (713) 0.79% (728) 0.81%
expenses
Trading 13693 15% 13382 15%
operating
profit

Other operating 354 0.39% 126 0.14%

income
Other operating (884) 0.98% (1100) 1.23%
expenses
Operating 13163 14.7% 12408 13.9%
profit

Financial 121 0.13% 101 0.11%

income
Financial (758) 0.8% (725) 0.81%
expense
Profit before 12526 14% 11784 13%
taxes,
associated with
joint ventures
Taxes (4413) 4.9% (3305) 3.72%
Income from 770 0.86% 988 1.11%
associates &
 joint ventures
Profit for the 8883 9.9% 9467 10%
year

Interpretation:
In above vertical analysis we compare all the values of each
account of assets with total amount of asset by dividing and by
dividing each liabilities an equity account with total liabilities.
By doing so we get certain percentages as above which shows
how much part an individual account has in total account.
Similarly, by dividing all the
income statements accounts with total sales we get some
percentages which shows how much proportion of each account
is in sales. For example: CGS amount (44199/ 89469 ) that
comes 49% of 100% sales.

Ratio analysis:
In ratio analysis we find out 5 types of ratios by using the data
given in firms financial statements. These 5 types of ratios are
as below:
Debt ratio
Liquiditiy ratio
Profitability ratio
Market ratio
Activity ratio
Ratios analysisfor the year 2015:
1. Liquidity ratios:
The two basic measures of liquidity are the current ratio and the quick
ratio.
Current ratio = Current assets Current liabilities
= 29434 33321
= 0.8833
Quick ratio = (Current assets Inventory) Current liabilities
= (29434 8153) 33321
= 0.63
2. Activity ratios:
It includes the following ratios:
Inventory turnover = Cost of goods sold Inventory
= 44730 8153
= 5.48

Average collection period = Accounts receivable (annual sales 365)

= 12252 (88785 365)
= 50.36
Average payment period = Accounts payable (annual purchase365)
=1729 (8401 365)
= 75.1%
Total asset turnover = Sales Total assets
 = 88785 123992
= 0.71
3. Debt ratios:
Debt ratio = Total liabilities Total assets
= 60006 123992
= 0.48
4. Profitability ratio:
Gross profit margin = (Sales Cost of goods sold) Sales
= (88785 44730) 88785
= 0.49%
Operating profit margin = Operating profit Sales
= 12408 88785
= 0.13%
Net profit margin = Net profit Sales
= 9467 88785
= 0.10%
Return on total assets = Earnings available for common
stockholders Total assets
= (9467 123992)
= 0.07%

Ratio analysis of the year 2016:

1. Liquidity ratios: The two basic measures of liquidity are the
current ratio and the quick ratio.
Current ratio = Current assets Current liabilities
= 32042 37517
= 0.8540
Quick ratio = (Current assets Inventory) Current liabilities
= (32042 8401) 37517
= 0.630
2. Activity ratios:
It includes the following ratios:
Inventory turnover = Cost of goods sold Inventory
= 44199 8401
= 5.26

Average collection period = Accounts receivable (annual sales 365)

= 12411 (89469 / 365)
= 50.63
Average payment period = Accounts payable (annual purchase365)
= 18629 (88785 365)
= 76.58

Total asset turnover = Sales Total assets

= 89469 131901
 = 0.67
3. Debt ratios:
Debt ratio = Total liabilities Total assets
= 131901 131901
= 1.00
4. Profitability ratio:
Gross profit margin = (Sales Cost of goods sold) Sales
= (89469 44199) 89469
= 0.50
Operating profit margin = Operating profit Sales
= 13163 89469
= 0.14%
Net profit margin = Net profit Sales
= 8883 89469
= 0.09%
Return on total assets = Earnings available for common
stockholders Total assets
= 64590 131901
= 0.48%