Vertical and Horizontal Analysis. Financial Analysis. Lecturer: Dr. Constantinos Adamides

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1 Vertical and Horizontal Analysis Financial Analysis Lecturer: Dr. Constantinos Adamides

2 Horizontal Analysis Comparison of financial information of a single company for two more years Examination of absolute changes (e.g. dollar amounts) and (usually) percentage changes from year to year

3 Trend Analysis Essentially in horizontal analysis what analysts do is a trend analysis, where s/he calculates the financial statements balances as percentages of the first year (also called the base year ) To calculate the changes: Change since Base Period = Current Year Amount Base Year Amount Base Year Amount To calculate the current year in relation to the base year: Current results in relation to base period = Current Year Amount year amount base Example: Sales: 2007 =10,000; 2008 =12,000 and 2009 = 9,000 Change since base year: 2008 change: = (12,000-10,000)/10,000 = 20% 2009 change = (9,000 10,000)/10,000 = -10% Sales as a % of base year: 2008: = 12,000/10,000 = 120% 2009: = 9,000/10,000 = 90%

relation to the base year: Current results in relation to base period = Current Year Amount year amount base Example: Sales: 2007 =10,000; 2008 =12,000 and 2009 = 9,000 Change

4 Unilate Horizontal Example The Balance sheet Assets Cash and equivalents Accounts receivables Inventory Total current assets Net plant and equipment a Total assets Liabilities and Equity Accounts payable Accruals Notes payable Total current liabilities Long term bonds Total liabilities (debt) Common stock (25,000,000 shares) Retained earnings Total common equity Total liabilities and equity

0 30.0 Accruals 55.0 60.0 Notes payable 35.0 40.0 Total current liabilities 105.0 130.0 Long term bonds 255.0 300.0 Total liabilities (debt) 360.

5 Horizontal Example 2008 as base year (100%) Assets Cash and equivalents % 37.50% Accounts receivables % % Inventory % % Total current assets % % Net plant and equipment a % % Total assets % % Liabilities and Equity Accounts payable % % Accruals % % Notes payable % % Total current liabilities % % Long term bonds % % Total liabilities (debt) % % Common stock (25,000,000 shares) % % Retained earnings % % Total common equity % % Total liabilities and equity % %

00% Accruals 100.00% 109.09% Notes payable 100.00% 114.29% Total current liabilities 100.00% 123.81% Long term bonds 100.00% 117.65% Total liabilities (debt) 100.

6 Vertical Analysis In this case the analyst calculates each item on a single financial statement as a percentage of a total. What are the totals? income statement: the net sales revenue Balance sheet: total assets This method is also known as component percentages Why? Because it produces common-size financial statements. This is important because the analyst can compare easily balance sheets and income statements, either across the years for a single company or across different companies.

income statement: the net sales revenue Balance sheet: total assets This method is also known as component percentages Why?

7 Unilate Example - Vertical Analysis Amount Percent Amount Percent Assets Cash and equivalents % % Accounts receivables % % Inventory % % Total current assets % % Net plant and equipment a % % Total assets % % Liabilities and Equity Accounts payable % % Accruals % % Notes payable % % Total current liabilities % % Long term bonds % % Total liabilities (debt) % % Common stock (25,000,000 shares) % % Retained earnings % % Total common equity % % Total liabilities and equity % %

0 2.00% 30.0 3.55% Accruals 55.0 7.33% 60.0 7.10% Notes payable 35.0 4.67% 40.0 4.73% Total current liabilities 105.0 14.00% 130.0 15.38% Long term bonds 255.0 34.00% 300.0 35.

8 Unilate Income Statement - Horizontal / -in 2009 Amount Amount Amount Percent Net sales % Variable operating costs (82% of sales) ( ) ( ) (53.30) 4.53% Gross profit % Fixed operating costs except depreciation (85.00) (90.00) (5.00) 5.88% (EBITDA) % Depreciation (40.00) (50.00) (10.00) 25.00% Net Operating income (NOI) =(EBIT) (3.30) -2.48% Interest (35.00) (40.00) (5.00) 14.29% Earnings before taxes (EBT) (8.30) -8.44% Taxes (40%) (39.30) (36.00) % Net income (5.00) -8.47% Preferred dividends Earnings available to common stockholders (EAC) (5.00) -8.47% Common dividends (27.00) (29.00) (2.00) 7.41% Addition to retained earnings (7.00) %

00% Net Operating income (NOI) =(EBIT) 133.30 130.00 (3.30) -2.48% Interest (35.00) (40.00) (5.00) 14.29% Earnings before taxes (EBT) 98.30 90.00 (8.30) -8.44% Taxes (40%) (39.30) (36.00) 3.30-8.

9 Unilate Income Statement Vertical analysis Amount Percent Amount Percent Net sales $1, Variable operating costs (82% of sales) -1, Gross profit $ Fixed operating costs except depreciation (EBITDA) Depreciation Net Operating income (NOI) =(EBIT) Interest Earnings before taxes (EBT) 98.3 Taxes (40%) Net income $ % 82.00% 18.00% 5.92% 12.08% 2.79% 9.29% 2.44% 6.85% 2.74% 4.11% $1, , $ $ $ $ % 82.00% 18.00% 6.00% 12.00% 3.33% 8.67% 2.67% 6.00% 2.40% 3.60% Preferred dividends 0 Earnings available to common stockholders (EAC) 59 Common dividends Addition to retained earnings % 4.11% 1.88% 2.23% 0 $ $ % 3.60% 1.93% 1.67%

30 Net income $59.00 100.00% 82.00% 18.00% 5.92% 12.08% 2.79% 9.29% 2.44% 6.85% 2.74% 4.11% $1,500.00-1,230.00 $270.00-90.00 180.00-50.00 $130.00-40.00 $90.00-36.00 $54.00 100.00% 82.00% 18.00% 6.

10 Question 1 Vertical Analysis percentages for SDI firm s Sales, COGS and Expenses are listed below: Sales 100% 100% 100% COGS 59.2% 62.4% 64.5% Expenses 25% 26.6% 27.5% Did SDI s net income as a percent of sales increase or decrease or remained unchanged over the period of the 3 years. Provide a numerical answer

11 Question 2 Horizontal Analalysis percentages for TDI sales, COGS and expenses are listed below: Sales 96.2% 106.8% 100% COGS 102.0% 97% 100% Expenses 110.6% 95.4% 100% Explain whether TDI s Net Income increased, decreased or remained unchanged over the 3 year period

8% 100% COGS 102.0% 97% 100% Expenses 110.6% 95.

12 Question Receivables 600, ,000 Inventory 780, ,000 Total Assets 3,136,000 2,800,000 Using the Data here prepare a horizontal analysis

13 Question Receivables 600, ,000 Inventory 780, ,000 Total Assets 3,136,000 2,800,000 Using the Data here prepare a vertical analysis

2-8. Identify whether each of the following items increases or decreases cash flow:

Problems 2-8. Identify whether each of the following items increases or decreases cash flow: Increase in accounts receivable Increase in notes payable Depreciation expense Increase in investments Decrease