Horizontal analysis can be used to compare a company against itself

over multiple periods to determine if there is an identifiable trend to the

organization's performance which would assist users in their ability to
predict the future performance based on the past trends. It can also show
that no determinable trend exists, and this would raise questions about
the quality of the strategies being followed by management. Horizontal
analysis can also be used to compare an organization against a
competitor or with industry data to determine how it is performing
comparatively. Horizontal analysis can used base year analysis, but this
is not the best form of analysis since the farther the current period is
from the base year, the more difficult and meaningless the analysis
becomes. The difference between the two operational periods under
review cannot be separated into the effects of inflation and changes in
volume.
To overcome this deficiency it is better to prepare what is called year on
year analysis (rolling year analysis). When this method is used, the
current year is compared with the year just prior.

Generally it is clearly understood how vertical analysis is performed

however it use as an evaluation tool seems not to be as clearly
understood. vertical analysis is a great tool for comparing organizations
of differing sizes since it removes the numbers bias as percentages are
absolute measures. (the tendency to see larger amounts as better than
smaller numbers). All elements of the financial statements are changed
from numbers to percentages. For the income statement the base number
is the net sales which is the 100%. All other elements in the income
statement is expressed as a percentage of the net sales. The value of this
information is that it speaks to good cost controls as from period to
period the relationship between individual line item and the net sales
will show those expenses that are changing and by how much. This
change in percentage is easier seen than it would as a number.

When analyzing the balance sheet, the total assets/total liabilities and
equity is the 100%. The comparison of the line items speaks to the
quality of the asset base. A period to period review will allow the analyst
to determine when a problem could be developing as the ratios of the
individual line items to total assets change adversely. By way of an
example, if accounts receivable was 24 % of total assets in one year and
then it was 32 % in the following year, this could be an indication of
difficulties in collecting the receivables.
The analysis of the liabilities tells us about the portion of the assets
which were purchased using debt and which portion was purchased
using equity. this speaks about the level of risk the organization is
viewed as carrying. the higher the portion of assets purchased using debt
the higher the risk and the lower the portion purchased using debt the
lower the risk.