There are various methods for analyzing financial statements; the choice of the right one depends on the specific tasks set for yourself and the required amount of information. Vertical and horizontal balance sheet analysis are two commonly used methods. Horizontal and vertical analysis are used by many companies to analyze financial statements and increase company income and maintain a stable position of the enterprise. Also, these analysis methods are used by investors, banks and other lenders to reduce financing risks.

Vertical balance analysis

Vertical analysis of the balance sheet is also called structural, as it shows the structure of the final data of the balance sheet in the form of relative values. In a vertical analysis, reporting items are given as a percentage of its total. This type of analysis allows you to see changes in balance sheet items, for example, what happened to the company’s working capital, accounts receivable, and payables compared to previous years. Percentage indicators clearly show how much deviations have occurred and in what direction; this method is more convenient for analysis, since when calculating in absolute values ​​it is not always clear how much the situation has worsened or improved.

In vertical analysis, the total amount of assets (if the balance sheet is analyzed) and revenue (when analyzing the financial position) is taken as one hundred percent, and each further item is presented as a percentage of the base value. The percentage is calculated by dividing each line for the analyzed year by the balance sheet currency and multiplying by 100%. For example, working capital as of 01/01/2015 is 450,110, divide this amount by the balance sheet currency 775,600 and multiply by 100%. The indicator as of 01/01/2015 is 58.03% (450,110 / 775,600 *100). In the same way, we calculate the percentage as of 01/01/2016, which is equal to 63.28%. It turns out that current assets increased by 5.25% compared to last year.

Example of a vertical analysis of a balance sheet:

	Enterprise balance sheet	Indicator values		Vertical analysis
	ASSETS
	Working capital
	Inventory
	Fixed assets
	Buildings and constructions
	Depreciation
	PASSIVE
	Equity
	Long-term debt
	Short-term debt		266 300

The results of the analysis show that working capital accounts for 63% of the company’s assets and the increase in this indicator was due to an increase in accounts receivable. It's worth thinking about why it's growing. The number of fixed assets also decreases as a result of their disposal. The liability side of the balance sheet shows that the share of short-term debt is 1/3 of the balance sheet and does not undergo major changes. Long-term debt has decreased slightly, and the share of equity capital accounts for 50% of total liabilities, which indicates the average level of stability of the company.

Horizontal balance sheet analysis

Horizontal analysis helps examine changes in balance sheet totals over time. You can trace the changes that occurred over the previous and previous years, you can understand whether the result was positive or negative. Any two or three periods are taken for analysis; these can be quarters or years. As part of the temporary analysis of the balance sheet, the values ​​of both absolute indicators in monetary terms and relative indicators in percentage terms are compared. For example, what happened to accounts receivable for the year. The example below shows that accounts receivable increased by 44%.

Horizontal and vertical analysis of the balance sheet complement each other and can be used simultaneously.

An example of a horizontal analysis of an enterprise’s financial statements:

			Indicator values		Horizontal analysis
					Absolute change	Relative change, %
		ASSETS			(810 400 - 775 600)	(34,800/810,400) x 100
		Working capital
		Inventory
		Short-term receivables
		Cash and short-term financial investments
		Fixed assets			- 27 890
		Buildings and constructions
		Depreciation
		PASSIVE
		Equity
		Long-term debt
		Short-term debt		266 300	- 30 200

The essence and purpose of horizontal financial analysis is the assessment and analysis of financial statements: balance sheet, income statement, cash flow statement. The analysis is aimed at identifying the organization’s weaknesses and identifying areas for increasing financial reliability, solvency, reducing the level of bankruptcy risk or increasing investment attractiveness. In this article, we will use an example to analyze the horizontal balance sheet analysis for KAMAZ PJSC.

Horizontal analysis is a method for assessing the dynamics of change and direction (trend) of key financial reporting indicators.

Directions for using horizontal enterprise analysis

Conducting horizontal analysis for the balance sheet pursues the following goals and objectives:

• Assessing the dynamics of changes in the organization's assets and liabilities.
• Determination of the share of sources of financing of the company's capital.
• Diagnostics of changes in capital structure: shares of equity and borrowed funds, receivables and payables.
• Assessment of the operating efficiency of an enterprise expressed in the dynamics of net profit.
• Identify negative trends in the growth of balance sheet items that increase the degree of maneuverability of the company and its financial stability.

The resulting assessment is used in diagnosing the financial condition of the enterprise and allows us to identify problem areas. Managing and tracking critical changes in balance sheet indicators allows you to make timely management decisions. Horizontal analysis is also used to analyze the indicators of the income statement and cash flow statement. After conducting a comprehensive financial analysis of the state of the enterprise, they additionally use ratio and model analysis (models of solvency and bankruptcy assessment). For more information on key financial analysis ratios, read the article: →. Read about bankruptcy models in the articles: → , → , → .

Methods of horizontal financial analysis

Let's consider the main methods (approaches) of horizontal analysis of reporting and directions for their practical application ⇓.

Horizontal analysis methods	Application areas
Comparison of financial values ​​of the reporting period with indicators of the previous period	Used to assess short-term trends and express comparisons between the current and previous periods
Comparison of indicators for the reporting period with indicators for the same period last year	Used by organizations with seasonality in production and sales of products, which is also reflected in financial statements
Comparison of a number of financial indicators for previous periods	Used by companies to assess the long-term trend and growth/decline rate of key financial indicators
Comparative analysis of company indicators with industry indicators	Assessing the company’s position in the industry and the degree of its operating efficiency and competitiveness

An example of a horizontal analysis of the balance sheet of KAMAZ PJSC with conclusions in Excel

As an example of conducting a horizontal analysis, let’s take the financial statements of the KAMAZ OJSC enterprise, which can be downloaded from the company’s official website or via the link →

Let's consider how the analysis should be carried out: for the section “Non-current assets” and draw conclusions. Initially, it is necessary to enter balance sheet data for three periods: at the end of 2016, 2015 and 2014.

To calculate the absolute change in balance sheet indicators, it is necessary to subtract the values ​​of the previous year from the values ​​for the year in question. Relative change reflects the percentage of decrease or increase in balance sheet indicators.

Absolute change in intangible assets (G9) for 2015 =D9-C9

Relative change in intangible assets (J9) for 2015 = D9/C9

Absolute change in research and development results (G10) for 2015 =D10-C10

Relative change in research and development results (J10) for 2015 = D10/C10

Absolute change in fixed assets (G13) for 2015 = D13-C13

Relative change in fixed assets (J13) for 2015 = D13/C13

Absolute change in profitable investments in material assets (G14) for 2015 = D14-C14

Relative change in income investments in material assets (J14) for 2015 = D14/C14

Absolute change in financial investments (G15) for 2015 = D15-C15

Relative change in financial investments (J15) for 2015 =D15/C15

Absolute change in deferred tax assets (G16) for 2015 =D16-C16

Relative change in deferred tax assets (J 16) for 2015 = D16/C16

Absolute change in other non-current assets (G17) for 2015 = D17-C17

Relative change in other non-current assets (J 17) for 2015 = D17/C17

Absolute change in non-current assets (G18) for 2015 =D18-C18

Relative change in non-current assets (J 18) for 2015 = D18/C18

The figure below shows an example of calculations of absolute and relative changes in the balance sheet indicators of KAMAZ PJSC for three years ⇓.

After calculating the indicators for all lines of the balance sheet, it is necessary to assess the dynamics of change. Thus, the share of intangible assets of the enterprise decreased every year and, as a result, over the three years under review it decreased by -242,522 thousand rubles. ( E9-C9), which was a decrease of 72.4% ( 1-E9/C9).

The results of research and development increased every year and at the end of 2016 amounted to 922,633 thousand rubles, which was 474% compared to 2014 ( (E10-C10)/C10).

The fixed assets of KAMAZ OJSC were not changed evenly. A general downward trend over three years can be noted. At the end of 2016, fixed assets decreased by -2,280,198 thousand rubles. ( E13-C13), which in relative terms amounted to -9% ( (E13-C13)/C13).

Profitable investments in tangible assets have a positive growth trend compared to 2014 and increased by 189,172 thousand rubles. ( E14-C14), which in relative terms amounted to +13% ( (E14-C14)/C14).

Financial investments increased throughout all periods, at the end of 2016 23,558,019 thousand rubles. ( E15-C15), which in relative terms amounted to + 914% ( (E15-C15)/C15)

Deferred tax assets had a positive trend in each year under review. The increase was by 1,749,141 thousand rubles. ( E16-C16), which amounted to 67% ( (E16-C16)/C16).

Other non-current assets increased annually and at the end of 2016 amounted to + 479,025
thousand roubles. ( E17-C17), which in relative terms was +9% ( (E17-C17)/C17).

Total non-current assets over three years increased by +24,214,563 thousand rubles. ( E18-C18), which in relative terms amounted to +66% ( (E18-C18)/C18). There is a positive trend due to the growth of intangible assets, research and development results, profitable investments in tangible assets, financial investments, deferred and other non-current assets. The figure below shows the dynamics of changes in non-current assets ⇓.

conclusions

In the example discussed in the article, a horizontal analysis was carried out on the balance sheet of the KAMAZ PJSC enterprise for non-current assets. Analyzes are carried out similarly for other sections of the balance sheet: for current assets, capital and reserves, long-term and short-term liabilities, as well as reports: profit and loss statement and cash flow statement. The enterprise in question has a positive growth in non-current assets, which indicates the effective management of the organization.

Vertical analysis is a method for diagnosing the financial condition of an organization and assessing the dynamics of changes in the structure. The purpose and essence of vertical analysis of financial statements is to analyze changes in the structure of financial indicators for the period under review. This analysis is used to evaluate the structure of the balance sheet, income statement and cash flow statement. In the article, we will look at how a vertical analysis of the balance sheet and income statement is carried out using the example of the KAMAZ PJSC enterprise.

The directions for conducting a vertical analysis of the organization’s balance sheet are as follows:

• Assessment of structural changes in the company's assets/liabilities.
• Calculation of changes in the share of borrowed capital of the organization.
• Determination of the composition of working and non-working capital.
• Comparison of the capital structure of different companies or companies in different industries.

Vertical analysis can be used not only for the balance sheet, but also for the income statement ( form No. 2) when determining the structure of income and expenses. For example, to diagnose the structure of revenue or profit from sales, etc. Vertical analysis can similarly be used for the statement of changes in equity ( form No. 3) and cash flow statement ( form No. 4), but typically vertical analysis is limited to the balance sheet and income statement.

Comparison of vertical balance sheet analysis with other methods of financial analysis

Vertical analysis is one of the tools (methods) for analyzing the financial statements of an organization to diagnose a negative trend in changes in indicators, a decrease in financial stability due to an increase in the share of borrowed capital, etc. In addition to this, other methods are also used ⇓.

Title of financial statement analysis	Application areas	Advantages	Flaws
Vertical analysis (analogue: structural analysis)	Used to determine the organization's capital structure, financial indicators and changes in structure over time	Allows you to track structural changes in the company's assets and liabilities	Used for diagnostics Does not assess the financial condition of the enterprise
Horizontal analysis (analogue: trend analysis)	Used to assess the direction and forecast the dynamics of changes in financial indicators	Allows you to evaluate the dynamics of changes in financial indicators over the years	Serves more for diagnostics rather than for making management decisions and assessing financial condition
Ratio Analysis	Assessment of financial indicators characterizing: profitability, financial stability, turnover and liquidity of the organization	Gives an assessment of the effectiveness of certain indicators of the enterprise's economic activity. The introduced standards allow us to identify problematic indicators and make management decisions Used to assess the financial performance of enterprises in the same industry	It is difficult to determine the likelihood of bankruptcy risk and the level of financial reliability
Scoring (rating) assessment	Comprehensive assessment of the company’s financial condition, solvency and financial reliability. Application of bankruptcy probability assessment models, rating models, scoring and expert methods	A complex criterion based on a financial condition assessment model allows you to determine the likelihood of bankruptcy risk	The final estimate may be distorted due to a peak overestimation of one of the model indicators

An example of a vertical balance sheet analysis for PJSC KAMAZ in Excel

Let's consider an example of a vertical analysis of the balance sheet for the company PJSC KAMAZ. To do this, you need to download the balance from the company’s official website or from the link →.

Let's carry out a vertical analysis of non-current assets; for this it is necessary to assess what part / share is occupied by its components.

Share of intangible assets (F9) =C9/$C$18

Share of research and development results(F10) = C10/$C$18

Share of fixed assets(F13) = C13/$C$18

Share of profitable investments in material assets(F14) = C14/$C$18

Share of financial investments(F15) = C15/$C$18

Share of deferred tax assets(F16) = C16/$C$18

Share of other non-current assets(F17) = C17/$C$18

You can see that the sum of all parts gives 100%. The figure below shows an example of a vertical analysis of non-current assets in the balance sheet ⇓.

At the next stage, we can identify the maximum and minimum shares in the formation of non-current assets for 2014.

The maximum share in the formation of non-current assets (66.3%) is occupied by fixed assets, the minimum share is the results of research and development (0.4%). To reflect the dynamics of structure changes, it is necessary to construct an area diagram ⇓.

It can be noted that by 2016 there was a decrease in the share of fixed assets (PE) from 66.3% to 36.1% and an increase in the share of financial investments from 7% to 43%. A decrease in the share of fixed assets may indicate a decrease in the enterprise’s investments in production and the development of long-term potential. Fixed assets include: buildings, structures, equipment, vehicles, tools and equipment.

Vertical analysis of the income statement

The versatility of the method allows it to be used to analyze the statement of financial results (form No. 2) and determine how the share of expenses and income changed during the formation of revenue. For example, let’s take the previous financial statements of KAMAZ PJSC and reflect the change in revenue indicators for 2015 and 2016. You can see that the revenue is 100%.

Income from subsidies received (E8) =C8/C7

Cost of sales (E9) =C9/$C$7

Gross profit (E10) =C10/$C$7

All other lines of the income statement are calculated in the same way. The figure below shows an example of using the method ⇓.

As can be seen from the figure, the cost of production (expenses) is higher than revenue, but positive revenue is maintained due to income in the form of subsidies.

From 2015 to 2016, there was an increase in the share of gross profit from 4.6% to 9.%, a decrease in sales profit from 6.2% to 4.4%, and a decrease in profit before tax from 4.7% to 1.3%.

conclusions

Vertical analysis is used as a method of analyzing financial indicators from the balance sheet, income statement, and can also be used for the statement of cash flows and for the statement of capital flows. The method is used to assess the dynamics of the structure of assets and liabilities of the balance sheet. To conduct a comprehensive financial analysis, it must be used in conjunction with horizontal and ratio analysis, as well as assessment using bankruptcy models.

Characteristics of the method

Horizontal analysis means a method of comparing the values ​​of the same indicators over a certain time period. Another name for the method is temporary or dynamic, because the change in a certain year is assessed compared to the indicator in the previous or base year.

Horizontal analysis involves comparing data from one period with the previous one. As part of the financial horizontal analysis of the balance sheet, the value of, for example, accounts receivable for 2016 is compared with accounts receivable for 2015. The calculation of absolute and relative deviations is an important element of this method. Absolute deviation means a change in an indicator expressed in rubles or another currency. Relative deviation means the change in an indicator, expressed as a percentage.

In simple words: Horizontal analysis is a comparison of data over a certain time.

Horizontal analysis, like vertical analysis, can also be used when studying the main forms of financial statements of an enterprise: balance sheet, income statement, cash flow statement. In addition, during the analysis process, increases in indicators from various forms of financial statements should be compared, which will allow the formation of additional conclusions and recommendations.

Methodology for conducting horizontal analysis of reporting

The process involves determining the absolute deviation, as well as the relative increase in the indicator. For example, when determining a change in the amount of fixed assets, the formula will look like:

Absolute increase =

the amount of fixed assets in the current year -

Amount of fixed assets in the previous year

Relative growth =

absolute increase

amount of fixed assets in the previous year

When studying long-term phenomena occurring over three years or more, it is advisable to use deflators to obtain real results of changes in the phenomenon in the process of its development.

When performing an analysis of changes from year to year, observe the following rules:

1. If an element has a value in the base year, and does not have a zero value in the next period, the reduction is 100%.

2. A meaningful percentage change cannot be calculated if one number is positive and the other number is negative.

3. Percentage change cannot be calculated if there is no number in the base period.

Understanding the results of the horizontal analysis performed

The interpretation of the results depends on the phenomenon being studied. For example, a decrease in the value of fixed assets may be evidence of a decrease in the production potential of the enterprise, i.e. is a negative phenomenon. At the same time, the reduction in unfinished construction projects indicates that the enterprise has introduced new fixed assets into its activities, i.e. is a positive thing. An increase in the amount of equity capital leads to an improvement in financial stability indicators.

Example

When examining financial statements and ratios, it is also important to identify trends because they are just as important to understanding a company's performance as absolute or relative figures. Trend analysis provides important information regarding historical performance and growth and, given the long history of accurate seasonal information, can be of great assistance as a planning and forecasting tool for managers and analysts.

Table 1 – Horizontal analysis of the balance sheet for a hypothetical company for 5 years, thousand rubles.

Indicators						Absolute deviation	Relative deviation
Fixed assets
Fixed assets
Accounts receivable
Financial investments
Cash and equivalents
Current assets

Table 1 presents a partial balance sheet for a hypothetical company over five periods. The last two columns of the table show changes for period No. 5 compared to period 1, which are expressed both in absolute currency (in this case, in rubles) and as a percentage. It is worth considering the reasons why the change occurs, which will allow us to understand the trends that have formed in the company. In this example, the largest percentage change is shown by investments, which decreased by 33.3 percent. However, an examination of the absolute currency amount of the change shows that investment only changed by RUB 2 thousand, and the more significant change was an increase of RUB 12 thousand. accounts receivable.

Horizontal analysis of balance sheets highlights the structural changes that have occurred in the business. Past trends are obviously not necessarily an accurate predictor of the future, especially when economic or competitive environmental changes occur. Research into past trends is more valuable when macroeconomic conditions and the competitive environment are relatively stable and when the analyst is looking at a stable or mature business. However, even in less stable conditions, historical analysis can provide a basis for developing forecasts. Understanding past trends is helpful in assessing whether these trends will continue or change direction.

One measure of success for a company is to grow faster than the growth rate of the market in which it operates. Companies that grow slowly may be unable to raise capital. On the other hand, companies that grow too quickly may find that their administrative and management information systems cannot keep up with the speed of expansion.

Relationships between financial reporting forms in horizontal analysis

The trend data generated by horizontal analysis can be compared with other elements of the financial statements. For example, the asset growth rate for the hypothetical company in Table 1 can be compared to the company's revenue growth over the same time period. If revenues grow faster than assets, then the company increases its efficiency (that is, produces more revenue for every ruble invested in assets).

As another example, consider the annual percentage changes for a hypothetical company:

Revenue +20%

Net profit +25%

Operating cash flow -10%

Assets +30%

Net profit is growing faster than revenue, indicating growing profitability. However, the analyst would have to determine whether the higher rate of net income growth arose from ordinary activities or from non-operating activities. Additionally, a 10 percent decline in operating cash flow despite growth in revenue and net income clearly warrants further investigation as it may indicate problematic earnings quality. Finally, the fact that assets were growing faster than revenue shows that the company's performance was declining. The analyst must study the factors behind the increase in assets and the reasons for these changes.

Sources:

Thomas R. Robinson, International financial statement analysis / Wiley, 2008, 188 pp.

Kogdenko V.G., Economic analysis / Textbook. - 2nd ed., revised. and additional - M.: Unity-Dana, 2011. - 399 p.

Buzyrev V.V., Nuzhina I.P. Analysis and diagnostics of financial and economic activities of a construction enterprise / Textbook. - M.: KnoRus, 2016. - 332 p.

What do horizontal and vertical analysis show?

Vertical analysis of the balance sheet is based on calculating the shares of individual balance sheet items in relation to the value of its assets (liabilities) by dividing the asset or liability items by the balance sheet amount. It allows you to identify the specific weight of each item and analyze the stability of the financial condition of the enterprise at the time of reporting, as well as assess its dynamics. Vertical analysis shows the structure of the enterprise's funds and their sources.

Horizontal analysis of the balance sheet is based on item-by-item comparison of balance sheet indicators at certain equal intervals of time. There are several types of horizontal analysis. The most common methods are based on calculations:

• absolute deviations:

SB = SB 1 − SB 2 ;

• relative deviations (increase):

SB% = (SB 1 − SB 2) / SB 2 × 100;

• growth rate:

SB tr% = SB 1 / SB 2 × 100,

where SB 1 and SB 2 are indicators of balance sheet items recorded at the final and initial points in time.

The combination of horizontal and vertical analysis allows us to understand the dynamics of development and growth rates of the enterprise.

Horizontal and vertical analysis using the example of an enterprise

Let's look at how horizontal and vertical analysis of the balance sheet is done using the example of the company Mirny LLC.

Example

Balance sheet data of Mirny LLC for the last 3 reporting years:

Let's analyze the structure of indicators over time using vertical analysis of the balance sheet.

Horizontal analysis data:

Basic procedures for balance sheet analysis

All procedures for analyzing an organization's balance sheet are based on data from its public financial statements for one or more periods. In the process of analysis, strong and weak trends in the development of the enterprise are identified, and recommendations are made to improve its financial condition.

Analysis of an enterprise's balance sheet includes several stages.

Conducting a comprehensive analysis of the structure of the balance sheet is important precisely because individual analytical methods do not always make it possible to accurately identify the current dynamics.

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For example, a consistent increase in the balance sheet currency may indicate an increase in the company’s business activity, an unjustified increase in accounts receivable and payable, or an overstocking of warehouses.

What does the structure of the balance sheet show?

The structure of the balance sheet shows which assets and liabilities make the main contribution to it, how dynamically the company is developing, whether its position is stable, how well its debt obligations are secured by assets and whether they will be repaid on time.

Most often, the “golden rule of economics” is used to analyze the structure of the balance sheet.

Growth in net profit ≥ Growth in equity capital ≥ Growth in assets ≥ 1

Another indicator that people pay attention to when analyzing the quality of a company’s balance sheet is its total. The growth of this indicator from period to period, as a rule, indicates that the enterprise is developing successfully. They attract additional funds, increase reserves, and modernize their main production facilities.

B 1 > B 2 > B 3,

where B is the balance sheet currency.

Another important indicator is the growth rate of current and non-current assets, as well as short-term liabilities. As a rule, the excess of the growth rate of current assets over non-current assets indicates the mobility of the enterprise structure and its liquidity.

At the same time, the growth of non-current assets indicates that the company is investing a lot of money in re-equipment.

An analysis is also made of the growth of sources of long-term financing of the enterprise and the growth rate of its non-current assets. Exceeding the growth rate of funding sources indicates that the enterprise has the potential for development.

In addition, the percentage of equity capital, the growth rate of accounts payable and receivable, and the absence or presence of uncovered losses are determined.

Basic techniques for analyzing the balance sheet

Today, many different methods of analyzing the balance sheet are used, based on a comparison of balance sheet items and calculated ratios.

In addition to horizontal and vertical, trend and comparative methods of analysis are often used.

Trend analysis is based on comparing the same balance sheet indicator at certain intervals. That’s why it is often associated with the horizontal. It is believed that in order to conduct a qualitative analysis, it is necessary to have data for at least 5 years.

Trend analysis is used to forecast the development of an enterprise. Its application is based on the assumption that the external conditions in which the enterprise operates remain unchanged.

Factor analysis is based on identifying the reasons that influence a particular financial reporting indicator. Most often this relationship is expressed in the form of equations.

Methods of factor analysis may vary depending on the industry characteristics of the company, its size, as well as on the methods enshrined in the company's accounting policies.

Ratio analysis is based on the study of the relationship between balance sheet items and their changes over time. This is the most effective and accurate analysis method.

However, the mere fact that the coefficient under study falls within a certain optimal interval does not guarantee that the enterprise fully satisfies the specified parameters.

This can only be confirmed by analyzing the company’s reporting indicators in comparison with the indicators of other companies operating under approximately the same conditions:

• solvency ratios;
• business activity ratios;
• financial stability ratios;
• investment ratios.

***

Horizontal and vertical methods of analysis of the balance sheet are an important, but not at all the main goal of financial analysis. They only show the dynamics and nature of changes in reporting indicators. In order to see the full picture of the company's development, it is also necessary to use other methods and tools of financial analysis.