Horizontal analysis helps identify abnormal changes over time, look at the illustration below.
Also known as Trends Statements, horizontal analysis may be performed in a financial model by means of:
- Long-term trends – growth rate for a 10 year period
- Year-to-year changes – indexed or percent changes
- Geometric growth rates – compound annual growth rates (CAGR)
Horizontal analysis, whilst simple to execute and useful to a certain extent, has its limitations. These limitations include:
- Being highly dependent on the selection of base year and the period under examination in the financial model.
- Horizontal analysis provides little insight into why the trend occurred in a financial model.
- Horizontal analysis does not provide insight into whether the trend in the financial model results was superior/inferior to some benchmark.
- Horizontal analysis does not address the challenge of negative numbers.
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