Module 9
Horizontal Analysis (Trend Analysis): A Learning Material
What Is Horizontal Analysis?
Horizontal Analysis—also known as trend analysis—is a financial analysis
tool used to compare a company’s financial performance across two or
more accounting periods. It helps users see how much the company’s
financial position or performance has changed over time, such as
whether assets increased, expenses decreased, or revenues grew.
This type of analysis is widely used by:
Managers, to evaluate financial progress.
Investors, to assess growth trends.
Creditors, to identify patterns in liquidity and solvency.
Students and researchers, to understand financial movement year
by year.
Purpose of Horizontal Analysis
Horizontal analysis is helpful because it:
1. Shows direction of change – whether an account increased or
decreased.
2. Measures the size of change – how large the movement is over
time.
3. Reveals trends – patterns of growth or decline across several years.
4. Supports decision-making – helping businesses plan for future
strategies.
How Horizontal Analysis Works
The analysis compares financial statement balances from one period (the
base year) to the next period (the current year).
To compute the change, follow these steps:
1. Compute the Amount of Change
This tells you how many pesos an account increased or decreased.
Amount of Change=Current Year Amount−Previous Year Amount
A positive answer means growth, while a negative answer means decline.
2. Compute the Percentage of Change
This shows how big the change is relative to the base year.
Amount of Growth/Reduction
Percentage of Change := ×10 0
Amount in the Previous Year
This percentage helps compare accounts of different sizes. For example:
A ₱200,000 increase may be small for cash but huge for supplies.
Percentage levels the comparison.
Example
If Accounts Receivable in 2023 is ₱2,000,000 and in 2024 is ₱2,400,000:
Amount of Change
= 2,400,000 – 2,000,000
= ₱400,000 increase
Percentage of Change
= (400,000 ÷ 2,000,000) × 100
= 20% increase
This means the company collected or made more sales on credit, improving
by 20%.
Why Horizontal Analysis Matters
Horizontal analysis helps identify:
Growing revenues (good for business expansion)
Increasing expenses (could signal inefficiencies)
Declining assets (possible maintenance or investment issues)
Rising liabilities (may indicate more debt than before)
It gives a historical view of the company’s performance, allowing
stakeholders to ask important questions like:
Why did expenses rise?
Why did cash decrease?
What caused revenue to grow?
Tips When Doing Horizontal Analysis
Always select a base year and compare logically.
Use at least two years, but three to five years show better trends.
Combine horizontal analysis with vertical analysis for deeper insight.
Look deeper into reasons behind the changes—analysis should not
stop with the numbers alone.
Summary
Horizontal analysis provides a powerful way to understand how a company
evolves over time. By comparing financial data from one year to another,
users can clearly see growth, stability, or decline. Mastering this tool helps in
evaluating business performance and supports informed financial decisions.