Phoenix Week 7-Ratio, Vertical, and Horizontal analysis
The three tools of financial statement analysis are the horizontal analysis, vertical analysis, and ratio analysis. These three tools help to evaluate the financial condition of a business.
The horizontal analysis, or trend analysis, evaluates a series of financial data over a period of time. It is primarily used in intercompany comparisons, with the purpose of determining increases or decreases in specific items over a time period of 2 or more years. These changes can be expressed either as an amount, or a percentage.
The vertical analysis, or common-size analysis, expresses each item in the financial statement, as a percentage of a base amount. Vertical analysis can show percentage changes individual assets, liabilities and stockholders equity. A benefit of the vertical analysis is being able to make comparisons of companies of different sizes.
The ratio analysis expresses the relationship among selected items in a financial statement. This relationship is expressed in the form of a percentage, rate, proportion . Ratio analysis can be used to evaluate liquidity, profitability, and solvency in addition to providing red flags that my not be apparent at first glance. PepsiCo, Inc. Appendix A
The current ratio for 2005 = 1.11%
$10,454 current assets
$ 9,406 current liabilities
The current ratio for 2004 = 1.28%
$8,639 current assets
$6,752 current liabilities
Two measures of vertical analysis
2005-total current assets are 33% of total assets
10,454 current assets
31,727 total assets
2004-total current assets are 31% of total assets 8,639 current assets
27,987 total assets
Two measures of horizontal analysis
Total current assets 2005 =10,454
Total current assets 2004 = 8,639
The total increase in 2005 is 1,815
Divided by the base year is 8,639 = 21% increase in assets from 2004 to 2005
Total current liabilities 2005= 9,406
Total current liabilities 2004=6,752
The total increase in 2005 is 2,654
Divided by the base year is 6,752= 39% increase in liabilities from 2004 to 2005
