Horizontal analysis of financial statements, a step-by-step introduction. Just like in the related video on vertical analysis, we are using an Excel file downloaded from the investor relations website of Meta Platforms / Facebook.

⏱️TIMESTAMPS⏱️
00:00 Introduction to horizontal analysis
00:20 Horizontal analysis balance sheet
07:06 Horizontal analysis income statement

Let’s start with a horizontal analysis of the balance sheet. The way the balance sheet numbers are presented here is with the oldest year on the right, and the latest year on the left. Horizontal analysis is used to evaluate a company's performance over time: spotting the direction of change in account balances, and the magnitude in which that change has occurred. The standard comparison for the balance sheet is current year versus prior year. Let’s calculate both the variance in dollars, as well as the percentage change. In other words V$ and V%. The variance in dollars is simply the current year number minus the prior year number. For the cash and cash equivalents line, cell F9 equals C9 minus D9. For the percentage change, there are two ways to build the formula. You can use the current year number minus the prior year number, and divide the outcome of that by the prior year base. Cell G9 equals open parentheses C9 minus D9 close parentheses, divided by D9. Let’s format this as a percentage, with no decimal points. The second, much simpler, way is to take the variance in dollars that we already calculated in cell F9 and divide it by the prior year base number in D9.

We can copy this all the way down for the various line items in assets, and then copy the formulas over to the liabilities and equity sections. In cell G31, an error message is shown as we are trying to divide by zero. Let’s replace that by NMF, not meaningful. Now that the calculations are done, let’s see what the numbers are trying to tell us in this #horizontalanalysis of the balance sheet.

If I were asked to provide some narrative to the assets increase in this horizontal analysis of the balance sheet, I would add the following in cell H21: Major increase in P&E $22B, and increase in other assets $4B, partially offset by a decrease in marketable securities ($5B).

In cell H41, the narrative to add is: introduction of long term debt $10B, and increase in accrued expenses $5B plus operating lease liabilities $3B, drive growth.

How about a horizontal analysis of the income statement as well? The standard comparison for the income statement in an annual report is for the past three years. We therefore have two comparisons to make in terms of the variance in dollars, as well as the percentage change. The way the income statement numbers are presented here is with the oldest year on the right, and the latest year on the left. Column G will contain the V$ 22 vs 21. Column H the V$ 21 vs 20. Let’s underline and center the words, and “slim fit” the column width. Column J will contain the V% 22 vs 21. Column K the V% 21 vs 20. Let’s underline and center the words, and “slim fit” the column width. Cell G6 equals C6 minus D6. Cell H6 equals D6 minus E6. Cell J6 equals G6 divided by D6. The absolute change between the years divided by the prior year / base year. Let’s format this as a percentage. Cell K6 equals H6 divided by E6. Now let’s copy over the formulas to each of the rows below, and then format the relevant subtotal lines in bold or italic. Just like in the example of horizontal analysis of the balance sheet, there is a percentage in cell J15 that does not make a lot of sense, so let’s put NMF for not meaningful in there.

What are the numbers trying to tell us in this horizontal analysis of the income statement?

If I were asked to provide some narrative to the operating income increase in this horizontal analysis of the income statement, I would add the following in cell C3: 21 vs 20: Spectacular revenue growth, and some cost productivity, drive very solid profitability growth.

22 vs 21: Major increase in R&D expense $11B, and gross margin erosion on flat revenue, drive profitability decline.

That’s how horizontal analysis provides you both with preliminary big picture insights, as well as excellent starting points to dive deeper into a company’s income statement and balance sheet!

Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In!

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