Comparison of Vertical and Horizontal Analysis

Comparison of Vertical and Horizontal Analysis

Overview

Very often it can be considered as an unnecessary step. However, it is advisable to carry out vertical and horizontal analysis of financial statements at the initial stage of the economic analysis of the enterprise. The vertical analysis makes it possible to single out, taking into account the industry specifics, the assets components and sources of funds that are most important for a given enterprise, and the horizontal analysis reveals the most significant changes in the structure of assets and directions of financing that took place during the period under the consideration.

Comparison of Vertical and Horizontal Analysis

The management and investors typically do horizontal and vertical analysis to visualize the changes that have occurred in the main items of the financial reports. Such analysis also helps managers make decisions about how to proceed with their business activities and investors whether a particular business is a good investment option.

The degree of details presented in the financial statement is determined by the goals that are set by the analyst. Sometimes, it is more convenient to carry out vertical and horizontal analysis of a short report, that is, some items can be consolidated. In cases where it is important to determine the significance of individual items of the particular report, the analysis should be carried out more thoroughly.

Vertical Analysis

The vertical analysis gives an idea of the structure of enterprise funds and their sources, expressed not in absolute units, but as percentages. This method consists in the fact that the total amount of the assets of the enterprise (when analyzing the Balance sheet) and revenue (when analyzing the Profit statement) are taken as one hundred percent, and each item of the financial report is computed as a percentage of this base value.

Facebook Inc.

Income Statement

All numbers in millions

Dec 31, 2019

Dec 31, 2018

Dec 31, 2019

Dec 31, 2018

Revenue

$70,697

$55,838

100.0%

100.0%

Cost of revenue

(12,770)

(9,355)

-18.1%

-16.8%

Gross profit

57,927

46,483

81.9%

83.2%

Research and development

(13,600)

(10,273)

-19.2%

-18.4%

Marketing and sales

(9,876)

(7,846)

-14.0%

-14.1%

General and administrative

(10,465)

(3,451)

-14.8%

-6.2%

Income from operations

23,986

24,913

33.9%

44.6%

Interest income

924

661

1.3%

1.2%

Interest expense

(20)

(9)

0.0%

0.0%

Foreign currency exchange losses, net

(105)

(213)

-0.1%

-0.4%

Other

27

9

0.0%

0.0%

Interest and other income (expense), net

826

448

1.2%

0.8%

Above, you can see a vertical analysis of Facebook’s Income Statement completed for two years. You can, of course, prepare vertical analysis for just one year, but a two-year is a much more useful format for the analysis. To prepare this report, you would need to divide all the items by the Revenue amount.

Horizontal Analysis

Horizontal or trend analysis of the financial data compiled in reports provides a different view of the same data. In order to do this type of analysis, you need to choose a base year. For our example, we will use the year 2017 as the base year. The calculation of the percentages necessary for the vertical and horizontal analysis is slightly different. For horizontal analysis, you first need to find the difference between the amount recorded for the same item for the base year and the comparison year. Then, you would divide this difference by the item’s amount for the base year.

For instance, if you have a revenue of $55,838 for the year 2018 and revenue of $40,653 for the year 2017, you would subtract $40,653 from $55,838 to get $15,185. Next, you need to divide this amount by $40,653 to get 37.35%. You will repeat this calculation for all the remaining values, making a calculation for each item horizontally across the years. For the Year 2017, the percentage for all items would be 100% because it is our base year.

Facebook Inc.

Income Statement

All numbers in millions

Dec 31, 2019

Dec 31, 2018

Dec 31, 2017

Dec 31, 2019

Dec 31, 2018

Revenue

70,697

55,838

40,653

74%

37%

Cost of revenue

(12,770)

(9,355)

(5,454)

134%

72%

Gross profit

57,927

46,483

35,199

65%

32%

Research and development

(13,600)

(10,273)

(7,754)

75%

32%

Marketing and sales

(9,876)

(7,846)

(4,725)

109%

66%

General and administrative

(10,465)

(3,451)

(2,517)

316%

37%

Income from operations

23,986

24,913

20,203

19%

23%

Interest income

924

661

398

132%

66%

Interest expense

(20)

(9)

(6)

233%

50%

Foreign currency exchange losses, net

(105)

(213)

(6)

1650%

3450%

Other

27

9

5

440%

80%

Interest and other income (expense), net

826

448

391

111%

15%

Income before provision for income taxes

24,812

25,361

20,594

20%

23%

Provision for income taxes

(6,327)

(3,249)

(4,660)

36%

-30%

Net income

18,485

22,112

15,934

16%

39%