Analytical Tools in Financial Modeling – Horizontal Analysis

Horizontal Analysis in Financial Modeling

Horizontal analysis helps identify abnormal changes over time, look at the illustration below.

Horizontal Analysis

Also known as Trends Statements, horizontal analysis may be performed in a financial model by means of:

  1. Long-term trends – growth rate for a 10 year period
  2. Year-to-year changes – indexed or percent changes
  3. 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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One Response to “Analytical Tools in Financial Modeling – Horizontal Analysis”

  1. […] Horizontal analysis helps identify abnormal changes over time. […]

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