how horizontal analysis works
horizontal analysis allows investors and analysts to see what has been driving a company s financial performance over several years and to spot trends and growth patterns this type of analysis enables analysts to assess relative changes in different line items over time and project them into the future an analysis of the income statement balance sheet and cash flow statement over time gives a complete picture of operational results and reveals what is driving a company s performance and whether it is operating efficiently and profitably the analysis of critical measures of business performance such as profit margins inventory turnover and return on equity can detect emerging problems and strengths for example earnings per share eps may have been rising because the cost of goods sold cogs has been falling or because sales have been growing steadily coverage ratios like the cash flow to debt ratio and the interest coverage ratio can reveal how well a company can service its debt through sufficient liquidity and whether that ability is increasing or decreasing horizontal analysis also makes it easier to compare growth rates and profitability among multiple companies in the same industry generally accepted accounting principles gaap are based on the consistency and comparability of financial statements 1 using consistent accounting principles like gaap ensures consistency and the ability to accurately review a company s financial statements over time comparability is the ability to review two or more different companies financials as a benchmarking exercise 