What is Vertical Analysis?

Vertical analysis is the proportional analysis of a financial statement, where each line item on the statement is listed as a percentage of another item. This means that every line item on an income statement is stated as a percentage of gross sales, while every line item on a balance sheet is stated as a percentage of total assets. A sample vertical analysis appears in the following exhibit.

What is Horizontal Analysis?

Horizontal analysis is the comparison of historical financial information over a series of reporting periods. It is used to see if any numbers are unusually high or low in comparison to the information for bracketing periods, which may then trigger a detailed investigation of the reasons for the difference. A sample horizontal analysis appears in the following exhibit.

Comparing Vertical Analysis and Horizontal Analysis

There are several important differences between the vertical and horizontal analysis concepts. They are as follows:

Reporting periods covered. Vertical analysis is focused on the relationships between the numbers in a single reporting period, while horizontal analysis spans multiple reporting periods.
Quality of analysis. The horizontal analysis method is more likely to spot anomalies, since it is relatively easy to identify spikes and drops within a report line item over an extended period of time. It is more difficult to do so when only using the information for a single reporting period.