Question

describe horizontal and vertical analysis, and ratio analysis. How can we use these techniques to learn more about the company?

Answer 1

Horizontal analysis means to compare the difference between the figures in the financial statements between to period. The difference and % of difference is calculated in this analysis.

Vertical analysis means to analysis on various items of the financial statements based on certain fixed item. For example in the vertical analysis of income statement, the gross sales is considered to be 100%, the remaining items of income statements such as cost of goods sold, gross margin, operating expenses and net income are calculated as a % of gross sales.

Ratio analysis is finding certain ratios and evaluating the performance of the company. The performance is evaluated based on liquidity, solvency, profitabilty and other financial ratios.

All the above analysis is useful in evaluating the performance of the company in the following ways-
1. It helps in comparing the performance of company with the industry standards or previous periods.
2. It helps in decision making for the board and investors.
3. It also helps the providers of capitals such as bankers, investors, in knowing their investment worthiness.