Horizontal Analysis

Horizontal Analysis

A financial statement analysis technique that compares specific line items over multiple time periods to identify trends, growth patterns, and changes in performance, using both absolute and percentage differences.

For instance, a horizontal analysis of a retailer’s income statement might reveal that revenue increased from $10 million to $12 million (20% growth) while cost of goods sold increased from $6 million to $7.5 million (25% growth), indicating a slight compression in gross margin percentage despite sales growth.

Also called trend analysis, horizontal analysis helps identify changes and trends that may not be apparent when examining a single period. When performing this analysis, each line item is compared to the same item in previous periods, typically expressing changes in both dollar amounts and percentages. The earliest period often serves as the base period for calculating percentage changes. This approach reveals growth rates, highlights unusual fluctuations requiring investigation, and provides insight into business momentum and long-term directional trends across multiple financial statement elements.