Vertical and Horizontal Analysis Financial Analysis Lecturer: Dr. Constantinos Adamides
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
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%
Unilate Horizontal Example The Balance sheet Assets Cash and equivalents 40.0 15.0 Accounts receivables 160.0 180.0 Inventory 200.0 270.0 Total current assets 400.0 465.0 Net plant and equipment a 350.0 380.0 Total assets 750.0 845.0 Liabilities and Equity Accounts payable 15.0 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) 360.0 430.0 Common stock (25,000,000 shares) 130.0 130.0 Retained earnings 260.0 285.0 Total common equity 390.0 415.0 Total liabilities and equity 750.0 845.0
Horizontal Example 2008 as base year (100%) Assets 2008 2009 Cash and equivalents 100.00% 37.50% Accounts receivables 100.00% 112.50% Inventory 100.00% 135.00% Total current assets 100.00% 116.25% Net plant and equipment a 100.00% 108.57% Total assets 100.00% 112.67% Liabilities and Equity Accounts payable 100.00% 200.00% 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) 100.00% 119.44% Common stock (25,000,000 shares) 100.00% 100.00% Retained earnings 100.00% 109.62% Total common equity 100.00% 106.41% Total liabilities and equity 100.00% 112.67%
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.
Unilate Example - Vertical Analysis 2008 2008 2009 2009 Amount Percent Amount Percent Assets Cash and equivalents 40.0 5.33% 15.0 1.78% Accounts receivables 160.0 21.33% 180.0 21.30% Inventory 200.0 26.67% 270.0 31.95% Total current assets 400.0 53.33% 465.0 55.03% Net plant and equipment a 350.0 46.67% 380.0 44.97% Total assets 750.0 100.00% 845.0 100.00% Liabilities and Equity Accounts payable 15.0 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 35.50% Total liabilities (debt) 360.0 48.00% 430.0 50.89% Common stock (25,000,000 shares) 130.0 17.33% 130.0 15.38% Retained earnings 260.0 34.67% 285.0 33.73% Total common equity 390.0 52.00% 415.0 49.11% Total liabilities and equity 750.0 100.00% 845.0 100.00%
Unilate Income Statement - Horizontal 2008 2009 + / -in 2009 Amount Amount Amount Percent Net sales 1435.00 1500.00 65.00 4.53% Variable operating costs (82% of sales) (1176.70) (1230.00) (53.30) 4.53% Gross profit 258.30 270.00 11.70 4.53% Fixed operating costs except depreciation (85.00) (90.00) (5.00) 5.88% (EBITDA) 173.30 180.00 6.70 3.87% Depreciation (40.00) (50.00) (10.00) 25.00% 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) 3.30-8.40% Net income 59.00 54.00 (5.00) -8.47% Preferred dividends 0.00 0.00 0.00 Earnings available to common stockholders (EAC) 59.00 54.00 (5.00) -8.47% Common dividends (27.00) (29.00) (2.00) 7.41% Addition to retained earnings 32.00 25.00 (7.00) -21.88%
Unilate Income Statement Vertical analysis 2008 2008 2009 2009 Amount Percent Amount Percent Net sales $1,435.00 Variable operating costs (82% of sales) -1,176.70 Gross profit $258.30 Fixed operating costs except depreciation -85.00 (EBITDA) 173.30 Depreciation -40.00 Net Operating income (NOI) =(EBIT) 133.3 Interest -35.00 Earnings before taxes (EBT) 98.3 Taxes (40%) -39.30 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% 6.00% 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 -27.00 Addition to retained earnings 32 0.00% 4.11% 1.88% 2.23% 0 $54.00-29.00 $25.00 0.00% 3.60% 1.93% 1.67%
Question 1 Vertical Analysis percentages for SDI firm s Sales, COGS and Expenses are listed below: 2009 2008 2007 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
Question 2 Horizontal Analalysis percentages for TDI sales, COGS and expenses are listed below: 2009 2008 2007 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
Question 3 2008 2009 Receivables 600,000 400,000 Inventory 780,000 600,000 Total Assets 3,136,000 2,800,000 Using the Data here prepare a horizontal analysis
Question 4 2009 2008 Receivables 600,000 400,000 Inventory 780,000 600,000 Total Assets 3,136,000 2,800,000 Using the Data here prepare a vertical analysis