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What are the comparative analysis techniques?

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Vertical analysis is a financial statement analysis technique that compares different items in a particular financial statement – income statement, balance sheet or cash flow statement – in a given period to a single item in that statement, expressed as a percentage of that item.  When applying vertical analysis to the balance sheet, the balance sheet items are presented as a proportion of the total assets.  When applying vertical analysis to the income statement, each expense item is presented as a proportion of total sales revenue together with the absolute amounts.

A common-size financial statement expresses each line item of a financial statement as a percentage of a base item of that statement, either of a single company over two periods or of two companies over the same period.  A common-size balance sheet shows each line item on the balance sheet divided by total assets expressed as percentages.  A common-size income statement shows each line item divided by total net revenues expressed as percentages.

Common-Size Statement over Three Years – Assets (Example)
Item Year 1 Year 2 Year 3
Cash  10.31%  10.11% 9.34%
Accounts Receivable  10.44% 10.61% 10.54%
Inventory  3.25% 4.17% 4.02%
Plant and Equipment, Net         76%   75.11%      76.1%
Total Assets       100%       100%       100%

Horizontal analysis is a financial statement analysis technique used to compute total and relative changes in amount of the line items of financial statements – income statements, balance sheets and statements of cash flows – over two or more periods of in order to evaluate trends.  The periods under consideration can be months, quarters or years.

Horizontal Analysis over Three Years – Assets (Example)
Item Year 1 Year 2 Year 3
Cash 100.00% 101.00% 102.01%
Accounts Receivable 100.00% 102.00% 104.04%
Inventory 100.00% 103.00% 106.09%
Plant and Equipment, Net   100.00% 103.08%   108.16%
Total Assets   100.00%   103.08%   106.27%

Absolute comparison is horizontal analysis that compares the absolute currency amounts of items over two or more time periods, while percentage comparison compares the percentage differences in certain items over time.  Where horizontal analysis is extended to three or more periods and the trends are shown in both amount and percentage in reference to the first period in the sequence, trend analysis is performed.

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