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Common-Size Financial Statement Analysis

Horizontal Analysis

Now it’s time to look at a different way to evaluate the income statement.  With horizontal analysis, we look across the income statement at the year-over-year (YoY) change in each line item.

In order to perform this exercise, you need to take the value in Period N and divide it by the value in Period N-1 and then subtract 1 from that number to get the percent change.

For example, revenue in 2017 was $4,000 and in 2016 it was $3,000.  The YoY change in revenue is equal to $4,000 / $3,000 minus one, which equals 33%.

horizontal analysis

To see exactly how to perform this horizontal analysis of financial statements please enroll in our Financial Analysis Fundamentals Course now!

#2 Balance sheet and leverage ratios

Let’s move on to the balance sheet.  In this section of financial statement analysis, we will evaluate the operational efficiency of the business.  We will take several items on the income statement, and compare them to the company’s capital assets on the balance sheet.

The balance sheet metrics can be divided into several categories, including: liquidity, leverage, and operational efficiency.