Horizontal analysis, also known as trend analysis, is a financial analysis technique that involves comparing financial data or performance metrics across multiple periods. The objective is to assess the trend or change in financial figures over time, typically in consecutive periods, such as comparing financial statements from one year to the next.

Key points related to horizontal analysis include:

1. **Comparison of Financial Statements:**
– Horizontal analysis involves the comparison of financial statements, such as income statements, balance sheets, or cash flow statements, for consecutive periods. The goal is to identify trends, changes, or fluctuations in key financial metrics.

2. **Calculation Method:**
– The most common method for calculating horizontal analysis is to express the change in financial figures as a percentage of the base period’s (earlier period’s) figures. The formula is:
\[ \text{Percentage Change} = \left( \frac{\text{Current Period Figure} – \text{Base Period Figure}}{\text{Base Period Figure}} \right) \times 100 \]

3. **Base Period:**
– The base period is the earlier period used as a reference for comparison. For example, if comparing financial statements for two consecutive years, the first year may be considered the base period.

4. **Interpretation:**
– Positive percentage changes indicate an increase in the financial metric, while negative percentage changes indicate a decrease. Analysts interpret the results to understand the direction and magnitude of the change.

5. **Key Financial Metrics:**
– Horizontal analysis can be applied to various financial metrics, such as revenues, expenses, net income, assets, liabilities, equity, and other relevant figures.

6. **Identifying Trends:**
– Analysts use horizontal analysis to identify trends in financial performance. It helps in understanding whether certain financial metrics are consistently improving, deteriorating, or remaining relatively stable over time.

7. **Comparing Multiple Periods:**
– While the most common use of horizontal analysis is comparing two consecutive periods, it can also be extended to analyze trends over multiple years or quarters.

8. **Limitations:**
– Horizontal analysis does not provide insights into the reasons behind the changes observed. It is a diagnostic tool that highlights changes but requires additional analysis to understand the underlying factors.

9. **Complementary to Vertical Analysis:**
– Horizontal analysis is often used in conjunction with vertical analysis, which involves comparing each line item to a base item within the same period. Together, they offer a comprehensive view of financial performance.

10. **Use in Financial Reporting:**
– Publicly traded companies often include horizontal analysis in their financial reports, especially in the Management Discussion and Analysis (MD&A) section. This provides context for stakeholders to understand the company’s financial performance over time.

11. **Benchmarking:**
– Horizontal analysis allows companies to benchmark their performance against industry averages or competitors over multiple periods, helping them assess their relative standing in the market.

Horizontal analysis is a valuable tool for financial analysts, investors, and management to understand the trends and changes in a company’s financial performance. By comparing financial statements over time, stakeholders can gain insights into the company’s historical trajectory and make more informed decisions.