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Alternative Market Briefing

How to perform horizontal and vertical analysis of income statements

Thursday, March 16, 2017

Matthias Knab, Opalesque:

Vintage Value Investing writes on Harvest Exchange:

As an investor, you should be digging in to a company's financial statements.

However, you can't look at these financials in isolation it's important to compare a company's results to other companies in the selected industry, companies outside of the industry, and against other years to determine whether or not that company might actually be an attractive investment.

This causes difficulties, since it's hard to compare companies of different sizes. For example, if Company A has $3,000,000 of debt outstanding and Company B has $30,000,000 of debt outstanding, is Company A less risky than Company B? We have no way of knowing, because we don't know the cash positions of Companies A and B, how profitable Companies A and B are, etc.

Fortunately, there are two forms of analysis that we can perform that will help us look at income statements and balance sheets of different sizes, so that we can compare apples-to-apples, they are: horizontal analysis and vertical analysis . Both are very easy to understand. Let's start with horizontal analysis.

What is Horizontal Analysis?

Horizontal analysis, also called time series analysis, focuses on trends and changes in numbers over time. Horizontal all......................

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