Horizontal analysis In Evaluating Companies Performance

July 18, 2023

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Type	Essay
Writer Level	Masters
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Description/Paper Instructions

Horizontal analysis In Evaluating Companies Performance

Horizontal analysis, also known as trend analysis, is a financial analysis technique used to evaluate the performance of a company over a period of time. It involves comparing financial statements, such as income statements and balance sheets, for multiple periods to identify trends and changes in key financial metrics.

The objective of horizontal analysis is to assess the direction and magnitude of changes in financial data and to identify areas of strength or weakness in a company’s performance. By examining trends, analysts can gain insights into the company’s growth, stability, and overall financial health.

To conduct horizontal analysis, financial statements from different periods are compared side by side. The most common approach is to use two or more years’ worth of data. The analysis can also be done for quarterly or monthly financial statements, depending on the availability of data and the specific requirements of the analysis.

The first step in horizontal analysis is to calculate the dollar amount and percentage change for each line item in the financial statements. Dollar amount change is simply the difference between the values of a specific line item in different periods. Percentage change is calculated by dividing the dollar amount change by the base period value and multiplying by 100.

For example, let’s consider a company’s revenue for two consecutive years:

Year 1 revenue: $1,000,000

Year 2 revenue: $1,200,000

The dollar amount change would be $1,200,000 – $1,000,000 = $200,000. The percentage change would be ($200,000 / $1,000,000) * 100 = 20%.

After calculating the changes, the analyst can create a horizontal analysis report or a trend analysis report. The report typically includes a column for each period being analyzed, showing the dollar amount and percentage changes for each line item. The report may also include additional analysis, such as explanations for significant changes or comparisons with industry benchmarks.

Horizontal analysis allows analysts to identify and interpret trends and patterns in financial data. It helps answer questions such as:

Is the company growing or declining?

Are there any significant changes in revenue, expenses, or profitability?

Are there any patterns or trends in key financial ratios?

By analyzing trends, analysts can make informed decisions and recommendations regarding investment opportunities, financial strategies, and operational improvements.

There are several key benefits of horizontal analysis:

Identification of trends: Horizontal analysis enables the identification of long-term trends in a company’s financial performance. It helps management and investors understand the direction in which the company is heading and make strategic decisions accordingly.

Comparison with industry peers: Horizontal analysis allows for comparisons between a company’s financial performance and that of its industry peers. This helps identify whether the company is outperforming or lagging behind its competitors and provides insights into areas of improvement.

Detection of anomalies: By examining the year-to-year changes, horizontal analysis can identify significant anomalies or irregularities in financial data. These anomalies may indicate accounting errors, fraud, or other issues that require further investigation.

Evaluation of financial ratios: Horizontal analysis helps assess the changes in key financial ratios over time. It provides insights into the company’s financial stability, liquidity, profitability, and efficiency. By monitoring these ratios, management can identify areas that need attention and take appropriate actions.

However, it is important to note that horizontal analysis has some limitations. It relies solely on historical data and does not consider external factors that may influence a company’s performance. Moreover, it may not capture the underlying reasons behind the changes in financial data. Therefore, it is crucial to combine horizontal analysis with other financial analysis techniques for a comprehensive evaluation of a company’s financial performance.

In conclusion, horizontal analysis is a valuable tool for evaluating a company’s financial performance over time. By comparing financial statements from different periods, analysts can identify trends, assess changes in key metrics, and gain insights into the company’s growth and stability. Although it has limitations, horizontal analysis provides a foundation for decision-making and strategic planning, helping stakeholders make informed choices about investments and business operations.

Horizontal analysis In Evaluating Companies Performance

RUBRIC

QUALITY OF RESPONSE	NO RESPONSE	POOR / UNSATISFACTORY	SATISFACTORY	GOOD	EXCELLENT
Content (worth a maximum of 50% of the total points)	Zero points: Student failed to submit the final paper.	20 points out of 50: The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking.	30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking.	40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete.	50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing.
Use of Sources (worth a maximum of 20% of the total points).	Zero points: Student failed to include citations and/or references. Or the student failed to submit a final paper.	5 out 20 points: Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6^th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper.	10 out 20 points: References to scholarly sources are occasionally given; many statements seem unsubstantiated. Frequent errors in APA 6^th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources.	15 out 20 points: Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented. APA 6^th Edition is used with only a few minor errors. There are minor errors in reference and/or citations. And/or there is some use of questionable sources.	20 points: Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented. APA 6^th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment.
Grammar (worth maximum of 20% of total points)	Zero points: Student failed to submit the final paper.	5 points out of 20: The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors	10 points out 20: The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors	15 points out of 20: The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage.	20 points: The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free.
Structure of the Paper (worth 10% of total points)	Zero points: Student failed to submit the final paper.	3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6^th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6^th edition requirements whatsoever.	5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6^th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements. The student also significantly writes too large or too short of and paper	7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment.	10 points: Student provides a high-caliber, formatted paper. This includes an APA 6^th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper.

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Horizontal analysis In Evaluating Companies Performance

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